UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
10-K
For the fiscal year ended
December 31
, 2020
or
For the transition period from ______________________to _______________________
Commission file number
001-13253
(Exact name of registrant as specified in its charter)
|
|
|
|||||||
| (State or other jurisdiction of | (I.R.S. Employer | |||||||
| incorporation or organization) | Identification No.) | |||||||
|
|
|
|
|
|||||||||||
| (Address of principal executive offices) | (Zip Code) | |||||||||||||
(
662
)
680-1001
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||
|
|
|
|
||||||
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes
þ
No
¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes
¨
No
þ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes
☑
No
☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes
☑
No
☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
|
|
☑ | Accelerated filer | ☐ | ||||||||
| Non-accelerated filer | ☐ | Smaller reporting company |
|
||||||||
| ☐ | Emerging growth company |
|
|||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management's assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.
☑
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
☐
No
☑
As of June 30, 2020, the aggregate market value of the registrant’s common stock, $5.00 par value per share, held by non-affiliates of the registrant, computed by reference to the last sale price as reported on The NASDAQ Global Select Market for such date, was $
1,342,272,796
.
As of February 19, 2021,
56,238,556
shares of the registrant’s common stock, $5.00 par value per share, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Renasant Corporation and Subsidiaries
Form 10-K
For the Year Ended December 31, 2020
CONTENTS
| Page | ||||||||
| Item 1. | ||||||||
| Item 1A. | ||||||||
| Item 1B. | ||||||||
| Item 2. | ||||||||
| Item 3. | ||||||||
| Item 4. | ||||||||
| Item 5. | ||||||||
| Item 6. | ||||||||
| Item 7. | ||||||||
| Item 7A. | ||||||||
| Item 8. | ||||||||
| Item 9. | ||||||||
| Item 9A. | ||||||||
| Item 9B. | ||||||||
| Item 10. | ||||||||
| Item 11. | ||||||||
| Item 12. | ||||||||
| Item 13. | ||||||||
| Item 14. | ||||||||
| Item 15. |
Exhibits and Financial Statement Schedules
|
|||||||
| Item 16. | ||||||||
PART I
This Annual Report on Form 10-K may contain or incorporate by reference statements regarding Renasant Corporation (referred to herein as the “Company”, “we”, “our”, or “us”) that constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Statements preceded by, followed by or that otherwise include the words “believes,” “expects,” “projects,” “anticipates,” “intends,” “estimates,” “plans,” “potential,” “possible,” “may increase,” “may fluctuate,” “will likely result,” and similar expressions, or future or conditional verbs such as “will,” “should,” “would” and “could,” are generally forward-looking in nature and not historical facts. Forward-looking statements include information about the Company’s future financial performance, business strategy, projected plans and objectives and are based on the current beliefs and expectations of management.
The Company’s management believes these forward-looking statements are reasonable, but they are all inherently subject to significant business, economic and competitive risks and uncertainties, many of which are beyond the Company’s control.
In addition, these forward-looking statements are subject to assumptions with respect to future business strategies and decisions that are subject to change. Actual results may differ from those indicated or implied in the forward-looking statements, and such differences may be material.
Currently, the most important factor known to management that could cause our actual results to differ materially from those in forward-looking statements is the continued impact of the COVID-19 pandemic and related governmental measures to respond to the pandemic on the United States economy and the economies of the markets in which the Company operates, including the Company’s participation in government programs related to the pandemic.
In this report, we have addressed the historical impact of the pandemic on the operations of the Company and set forth certain expectations regarding the COVID-19 pandemic’s future impact on the Company’s business, financial condition, results of operations, liquidity, asset quality, capital, cash flows and prospects.
We believe that our statements regarding future events and conditions in light of the COVID-19 pandemic are reasonable, but these statements are based on assumptions regarding, among other things, how long the pandemic will continue, the pace at which the COVID-19 vaccine can be distributed and administered to residents of the markets the Company serves and the United States generally, the duration, extent and effectiveness of the governmental measures implemented to contain the pandemic and ameliorate its impact on businesses and individuals throughout the United States, and the impact of the pandemic and the government’s virus containment measures on national and local economies, all of which are out of the Company’s control.
If the assumptions underlying our statements about future events prove to be incorrect, our business, financial condition, results of operations, liquidity, asset quality, capital, cash flows and prospects may be materially different from what is presented in the Company’s forward-looking statements.
Important factors other than the COVID-19 pandemic currently known to management that could cause actual results to differ materially from those in forward-looking statements include the following risks (which are addressed in more detail in Item 1A, Risk Factors, of this Form 10-K):
•
the Company’s ability to efficiently integrate acquisitions into its operations, retain the customers of these businesses, grow the acquired operations and realize the cost savings expected from an acquisition to the extent and in the timeframe anticipated by management;
•
the effect of economic conditions and interest rates on a national, regional or international basis;
•
timing and success of the implementation of changes in operations to achieve enhanced earnings or effect cost savings;
•
competitive pressures in the consumer finance, commercial finance, insurance, financial services, asset management, retail banking, mortgage lending and auto lending industries;
•
the financial resources of, and products available from, competitors;
•
changes in laws and regulations as well as changes in accounting standards, such as the adoption of the CECL model described herein as of January 1, 2020;
•
changes in policy by regulatory agencies;
•
changes in the securities and foreign exchange markets;
•
the Company’s potential growth, including its entrance or expansion into new markets, and the need for sufficient capital to support that growth;
•
changes in the quality or composition of the Company’s loan or investment portfolios, including adverse developments
1
in borrower industries or in the repayment ability of individual borrowers;
•
an insufficient allowance for credit losses as a result of inaccurate assumptions;
•
general economic, market or business conditions, including the impact of inflation;
•
changes in demand for loan products and financial services;
•
concentration of credit exposure;
•
changes or the lack of changes in interest rates, yield curves and interest rate spread relationships;
•
increased cybersecurity risk, including potential network breaches, business disruptions or financial losses;
•
civil unrest, natural disasters, epidemics and other catastrophic events in the Company’s geographic area;
•
the impact, extent and timing of technological changes; and
•
other circumstances, many of which are beyond management’s control.
The COVID-19 pandemic has exacerbated, and is likely to continue to exacerbate, the impact of any of these factors on the Company. Management believes that the assumptions underlying the Company’s forward-looking statements are reasonable, but any of the assumptions could prove to be inaccurate. Investors are urged to carefully consider the risks described elsewhere in this report and in the Company’s other filings with the Securities and Exchange Commission (the “SEC”) from time to time, including its Quarterly Reports on Form 10-Q, which are available at www.renasant.com and the SEC’s website at www.sec.gov.
The Company undertakes no obligation, and specifically disclaims any obligation, to update or revise forward-looking statements, whether as a result of new information or to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results over time, except as required by federal securities laws.
The information set forth in this Annual Report on Form 10-K is as of February 19, 2021 unless otherwise indicated herein.
ITEM 1. BUSINESS
General
Renasant Corporation, a Mississippi corporation incorporated in 1982, owns and operates Renasant Bank, a Mississippi banking corporation with operations in Mississippi, Tennessee, Alabama, Florida, Georgia, North Carolina and South Carolina. Renasant Bank, in turn, owns and operates Renasant Insurance, Inc., a Mississippi corporation with operations in Mississippi, and Park Place Capital Corporation, a Tennessee corporation with operations in Mississippi, Alabama and Tennessee. Renasant Bank is sometimes referred to herein as the “Bank,” while Renasant Insurance, Inc. is referred to herein as “Renasant Insurance” and Park Place Capital Corporation is referred to as “Park Place Capital.”
Our vision is to be the financial services advisor and provider of choice in each community we serve. With this vision in mind, management has organized the branch banks into community banks using a franchise concept. The franchise approach empowers community bank presidents to execute their own business plans in order to achieve our vision. Specific performance measurement tools are available to assist these presidents in determining the success of their plan implementation. A few of the ratios used in measuring the success of their business plan include:
| — | return on average assets | — | net interest margin and spread | |||||||||||
| — | the efficiency ratio | — | fee income shown as a percentage of loans and deposits | |||||||||||
| — | loan and deposit growth | — | the volume and pricing of deposits | |||||||||||
| — | net charge-offs to average loans | — | the percentage of loans past due and nonaccruing | |||||||||||
While we have preserved decision-making at a local level, we have centralized our legal, accounting, investment, risk management, loan review, human resources, audit and data processing/operations functions. The centralization of these functions enables us to maintain consistent quality and achieve certain economies of scale.
Our vision is further validated through our core values. Our core values include: (1) employees are our greatest assets, (2) quality is not negotiable and (3) clients’ trust is foremost. Centered on these values was the development of our strategic
2
plan that focuses on: (1) client satisfaction and development, (2) financial soundness and profitability, (3) growth, (4) employee satisfaction and development and (5) shareholder satisfaction and development.
Members of our Board of Directors also serve as members of the Board of Directors of the Bank (which has a broader membership than the Company board). Responsibility for the management of the Bank remains with the Board of Directors and officers of the Bank; however, management services rendered by the Company to the Bank are intended to supplement internal management and expand the scope of banking services normally offered by the Bank.
Operations
The Company has three reportable segments: a Community Banks segment, an Insurance segment and a Wealth Management segment. We do not have any foreign operations.
The COVID-19 pandemic that began in the United States in March 2020 significantly impacted the operations of our reportable segments.
Please refer to the discussion under the heading “Performance Overview – Impact of and responses to COVID-19” in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, later in this report.
Operations of Community Banks
Substantially all of our business activities are conducted through, and substantially all of our assets and revenues are derived from, the operations of our community banks, which offer a complete range of banking and financial services to individuals and to businesses of all sizes. As described in more detail below, these services include business and personal loans, interim construction loans, specialty commercial lending, treasury management services and checking and savings accounts, as well as safe deposit boxes and night depository facilities. Automated teller machines are located throughout our market area, and we have interactive teller machines in many of our urban markets. Our Online and Mobile Banking products and our call center also provide 24-hour banking services.
As of December 31, 2020, we had over 190 banking, lending and mortgage offices located throughout our markets in Mississippi, Tennessee, Alabama, Florida, Georgia, North Carolina and South Carolina. Customers may also conduct many banking transactions, such as opening deposit accounts and applying for certain types of loans, through our Online and Mobile Banking Products.
Lending Activities
. Income generated by our lending activities (including our Mortgage division), in the form of interest income, loan-related fees, and income from the sale and servicing of mortgage loans, comprises a substantial portion of our revenue, accounting for approximately 84.01%, 79.32% and 78.22% of our total gross revenues in 2020, 2019 and 2018, respectively. Total gross revenues consist of interest income on a fully taxable equivalent basis and noninterest income. Our lending philosophy is to minimize credit losses by following strict credit approval standards, diversifying our loan portfolio by both type and geography and conducting ongoing review and management of the loan portfolio. Loans are originated through either our commercial lending groups or personal bankers depending on the relationship and type of service or product desired. Our commercial lending group provides banking services to corporations or other business customers and originates loans for general corporate purposes, such as financing for commercial and industrial projects or income producing commercial real estate. Also included in our commercial lending group are experienced lenders within our specialty lines of business, which consist of our asset-based lending, Small Business Administration lending, healthcare, factoring, and equipment lease financing banking groups. Our personal banking group provides small consumer installment loans, residential real estate loans, lines of credit and construction financing and originates conventional first and second mortgages.
The following is a description of each of the principal types of loans in our loan portfolio, the relative credit risk of each type of loan and the steps we take to reduce such risk. Our loans are primarily generated within the market areas where our branches are located.
—
Commercial, Financial and Agricultural Loans
. Commercial, financial and agricultural loans (referred to as “C&I loans”), which accounted for approximately 23.20% of our total loans at December 31, 2020, are customarily granted to established local business customers in our market area on a fully collateralized basis to meet their credit needs. The terms and loan structure are dependent on the collateral and strength of the borrower. The loan-to-value ratios range from 50% to 85%, depending on the type of collateral. Terms are typically short term in nature and are commensurate with the secondary source of repayment that serves as our collateral.
Although C&I loans may be collateralized by equipment or other business assets, the repayment of this type of loan depends primarily on the creditworthiness and projected cash flow of the borrower (and any guarantors). Thus, the chief considerations when assessing the risk of a C&I loan are the local business borrower’s ability to sell its products/services, thereby generating sufficient operating revenue to repay us under the agreed upon terms and conditions, and the general business conditions of the
3
local economy or other market that the business serves. The liquidation of collateral is considered a secondary source of repayment. Another source of repayment are guarantors of the loan, if any. To manage these risks, the Bank’s policy is to secure its C&I loans with both the assets of the borrowing business and any other collateral and guarantees that may be available. In addition, we actively monitor certain financial measures of the borrower, including advance rate, cash flow, collateral value and other appropriate credit factors. We use C&I loan credit scoring models for smaller-size loans.
—
Real Estate – 1-4 Family Mortgage
. We are active in the real estate – 1-4 family mortgage area (referred to as “residential real estate loans”), with approximately 24.68% of our total loans at December 31, 2020, being residential real estate loans. In addition, in 2020, we originated for sale on the secondary market approximately $4.48 billion in residential real estate loans through our Mortgage division. We offer both first and second mortgages on residential real estate. Loans secured by residential real estate in which the property is the principal residence of the borrower are referred to as “primary” 1-4 family mortgages. Loans secured by residential real estate in which the property is rented to tenants or is not the principal residence of the borrower are referred to as “rental/investment” 1-4 family mortgages. We also offer loans for the preparation of residential real property prior to construction (referred to in this Annual Report as “residential land development loans”). In addition, we offer home equity loans or lines of credit and term loans secured by first and second mortgages on the residences of borrowers who elect to use the accumulated equity in their homes for purchases, refinances, home improvements, education and other personal expenditures. Both fixed and variable rate loans are offered with competitive terms and fees. Originations of residential real estate loans are generated through retail efforts in our branches or originations by or referrals from our Mortgage division and online through our Renasant Consumer Direct channel. We attempt to minimize the risk associated with residential real estate loans by strictly scrutinizing the financial condition of the borrower; typically, we also limit the maximum loan-to-value ratio. With respect to second lien home equity loans or lines of credit, which inherently carry a higher risk of loss upon default, we limit our exposure by limiting these types of loans to borrowers with high credit scores.
We retain residential real estate loans in our portfolio when the Bank has sufficient liquidity to fund the needs of established customers and when rates are favorable to retain the loans. Retained portfolio loans are made primarily through the Bank’s variable-rate mortgage product offerings.
As noted above, we also originate residential real estate loans with the intention of selling them in the secondary market to third party private investors or directly to government sponsored entities. In addition to the origination channels mentioned above, mortgage loans held for sale are also originated through wholesale relationships where we purchase loans from smaller banks, credit unions and brokerage shops. When these loans are sold, we either release or retain the related servicing rights, depending on a number of factors, such as the pricing of such loans in the secondary market, fluctuations in interest rates that would impact the profitability of the loans and other market-related conditions. Residential real estate originations to be sold are sold either on a “best efforts” basis or under a “mandatory delivery” sales agreement. Under a “best efforts” sales agreement, residential real estate originations are locked in at a contractual rate with third party private investors or directly with government sponsored agencies, and we are obligated to sell the mortgages to such investors only if the mortgages are closed and funded. The risk we assume is conditioned upon loan underwriting and market conditions in the national mortgage market. Under a “mandatory delivery” sales agreement, the Company commits to deliver a certain principal amount of mortgage loans to an investor at a specified price and delivery date. Penalties are paid to the investor if we fail to satisfy the contract. The Company does not actively market or originate subprime mortgage loans.
—
Real Estate – Commercial Mortgage
. Our real estate – commercial mortgage loans (“commercial real estate loans”) represented approximately 41.66% of our total loans at December 31, 2020. Included in this portfolio are loans in which the owner develops a property with the intention of locating its business there. These loans are referred to as “owner-occupied” commercial real estate loans. Payments on these loans are dependent on the successful development and management of the business as well as the borrower’s ability to generate sufficient operating revenue to repay the loan. The Bank mitigates the risk that our estimate of value will prove to be inaccurate by having sufficient sources of secondary repayment as well as guarantor support. In some instances, in addition to our mortgage on the underlying real estate of the business, our commercial real estate loans are secured by other non-real estate collateral, such as equipment or other assets used in the business.
In addition to owner-occupied commercial real estate loans, we offer loans in which the owner develops a property where the source of repayment of the loan will come from the sale or lease of the developed property, for example, retail shopping centers, hotels and storage facilities. These loans are referred to as “non-owner occupied” commercial real estate loans. We also offer commercial real estate loans to developers of commercial properties for purposes of site acquisition and preparation and other development prior to actual construction (referred to in this Annual Report as “commercial land development loans”). Non-owner occupied commercial real estate loans and commercial land development loans are dependent on the successful completion of the project and may be affected by adverse conditions in the real estate market or the economy as a whole.
We seek to minimize risks relating to all commercial real estate loans by limiting the maximum loan-to-value ratio and strictly scrutinizing the financial condition of the borrower, the quality of the collateral, the management of the property securing the
4
loan and, where applicable, the financial strength of the tenant occupying the property. Loans are usually structured either to fully amortize over the term of the loan or to balloon after the third year or fifth year of the loan, typically with an amortization period not to exceed 20 years. We also actively monitor such financial measures as advance rate, cash flow, collateral value and other appropriate credit factors. We generally obtain loan guarantees from financially capable parties to the transaction based on a review of the guarantor’s financial statements.
—
Real Estate – Construction
. Our real estate – construction loans (“construction loans”) represented approximately 7.85% of our total loans at December 31, 2020. Our construction loan portfolio consists of loans for the construction of single family residential properties, multi-family properties and commercial projects. Maturities for construction loans generally range from 6 to 12 months for residential property and from 24 to 36 months for non-residential and multi-family properties. Similar to non-owner occupied commercial real estate loans, the source of repayment of a construction loan comes from the sale or lease of newly-constructed property, although often construction loans are repaid with the proceeds of a commercial real estate loan that we make to the owner or lessor of the newly-constructed property.
Construction lending entails significant additional risks compared to residential real estate or commercial real estate lending, including the risk that loan funds are advanced upon the security of the property under construction, which is of uncertain value prior to the completion of construction. The risk is to evaluate accurately the total loan funds required to complete a project and to ensure proper loan-to-value ratios during the construction phase. We address the risks associated with construction lending in a number of ways. As a threshold matter, we limit loan-to-value and loan-to-cost ratios to 85% of when-completed appraised values for owner-occupied and investor-owned residential or commercial properties. We monitor draw requests either internally or with the assistance of a third party, creating an additional safeguard that ensures advances are in line with project budgets.
—
Installment Loans to Individuals
. Installment loans to individuals (or “consumer loans”), which represented approximately 1.92% of our total loans at December 31, 2020, are granted to individuals for the purchase of personal goods. Loss or decline of income by the borrower due to unplanned occurrences represents the primary risk of default to us. In the event of default, a shortfall in the value of the collateral may pose a loss to us in this loan category. Before granting a consumer loan, we assess the applicant’s credit history and ability to meet existing and proposed debt obligations. Although the applicant’s creditworthiness is the primary consideration, the underwriting process also includes a comparison of the value of the collateral, if any, to the proposed loan amount. We obtain a lien against the collateral securing the loan and hold title until the loan is repaid in full.
—
Equipment Financing and Leasing.
Equipment financing loans (or “lease financing loans”), which represented approximately 0.69% of our total loans at December 31, 2020, are granted to provide capital to businesses for commercial equipment needs. These loans are generally granted for periods ranging between two and five years at fixed rates of interest. Loss or decline of income by the borrower due to unplanned occurrences represents the primary risk of default to us. In the event of default, a shortfall in the value of the collateral may pose a loss to us in this loan category. We obtain a lien against the collateral securing the loan and hold title (if applicable) until the loan is repaid in full. Transportation, manufacturing, healthcare, material handling, printing and construction are the industries that typically obtain lease financing. In addition, we offer a product tailored to qualified not-for-profit customers that provides real estate financing at tax-exempt rates.
Addressing Lending Risks.
To protect against the risks associated with fluctuations in economic conditions within the Bank’s footprint and our borrowers’ specific financial conditions, management has implemented a strategy to proactively monitor the risk to the Company presented by the Bank’s loan portfolio as a whole. First, we purposefully manage the loan portfolio to avoid excessive concentrations in any particular loan category. Our goal is to structure the loan portfolio so that it is comprised of approximately one-third C&I loans and owner-occupied commercial real estate loans, one-third non-owner occupied commercial real estate loans and one-third residential real estate loans and consumer loans. Construction and land development loans are allocated between the commercial real estate and residential real estate categories based on the property securing the loan. With respect to construction and land development loans in particular, management monitors whether the allocation of these loans across geography and asset type heightens the general risk associated with these types of loans. We also monitor concentrations in our construction and land development loans based on regulatory guidelines promulgated by banking regulators, which involves evaluating the aggregate value of these loans as a percentage of our risk-based capital (this is referred to as the “100/300 Test” and is discussed in more detail under the “Supervision and Regulation” heading below) as well as monitoring loans considered to be high volatility commercial real estate. A further discussion of the risk reduction policies and procedures applicable to our lending activities can be found in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, under the heading “Risk Management – Credit Risk and Allowance for Credit Losses.”
To ameliorate the anticipated impact of the COVID-19 pandemic on our consumer and commercial customers, we implemented a loan deferral program.
Please refer to the discussion of this deferral program under the heading “Credit Risk and Allowance
5
for Credit Losses on Loans and Unfunded Commitments” in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, below.
Investment Activities
. We acquire investment securities to provide a source for meeting our liquidity needs as well as to supply securities to be used in collateralizing certain deposits and other types of borrowings. We primarily acquire mortgage backed securities and collateralized mortgage obligations issued by government-sponsored entities such as FNMA, FHLMC and GNMA (colloquially known as “Fannie Mae,” “Freddie Mac” and “Ginnie Mae,” respectively) as well as municipal securities. Generally, cash flows from maturities and calls of our investment securities that are not used to fund loan growth are reinvested in investment securities. We also hold investments in corporate debt and pooled trust preferred securities. At December 31, 2020, all of the Company’s investment securities were classified as available for sale.
Investment income generated by our investment activities, both taxable and tax-exempt, accounted for approximately 4.46%, 5.41% and 5.38% of our total gross revenues in 2020, 2019 and 2018, respectively.
Deposit Services
. We offer a broad range of deposit services and products to our consumer and commercial clients. Through our community branch networks, we offer consumer checking accounts with free online and mobile banking, which includes bill pay and transfer features, peer-to-peer payment, interest bearing checking, money market accounts, savings accounts, certificates of deposit, individual retirement accounts and health savings accounts.
For our commercial clients, we offer competitive checking and savings services as well as a suite of treasury management products which include, but are not limited to, remote deposit capture, account reconciliation, electronic statements, fraud protection via positive pay, ACH origination and wire transfer, lockbox services, overnight investment sweep options, enhanced business Internet banking and mobile banking.
Fees generated through the deposit services we offer accounted for approximately 5.88%, 7.78% and 9.52% of our total gross revenues in 2020, 2019 and 2018, respectively. The deposits held by the Bank have been primarily generated within the market areas where our branches are located.
Operations of Wealth Management
Our Wealth Management segment operates through two divisions: Trust and Financial Services. The Trust division, which is housed in the Bank’s trust department, offers a wide variety of fiduciary and custodial services, including investment advisory, accounting and administrative services (acting as trustee or in other capacities) for qualified retirement and other employee benefit plans, IRAs, personal trusts and estates. Our fees for managing these accounts are based on changes in market values of the assets under management in the account, with the amount of the fee depending on services we provide and the type of account.
The Financial Services division, which primarily operates through Park Place Capital (although the Bank’s trust department maintains some legacy financial service operations), offers specialized products and services to our customers.
These products and services include fixed and variable annuities, mutual funds and stocks, some of which are offered through a third party provider. Park Place Capital also provides administrative and compliance services for certain mutual funds.
For 2020, the Wealth Management segment contributed total revenue of $19.7 million, or 2.66% of the Company’s total gross revenues. Wealth Management operations are headquartered in Tupelo, Mississippi, and Birmingham, Alabama, but our products and services are available to customers in all of our markets through our community banks.
Operations of Insurance
Renasant Insurance is a full-service insurance agency offering all lines of commercial and personal insurance through major carriers. For 2020, Renasant Insurance contributed total revenue of $11.0 million, or 1.48% of the Company’s total gross revenues, and operated eight offices throughout north and north central Mississippi.
Competition
Community Banks
Vigorous competition exists in all major product and geographic areas in which we conduct banking business. We compete through the Bank for available loans and deposits and the provision of other financial services (such as treasury management) with state, regional and national banks in all of our service areas, as well as savings and loan associations, credit unions, finance companies, mortgage companies, insurance companies, brokerage firms and investment companies. All of these numerous
6
institutions compete in the delivery of products and services through availability, quality and pricing, and many of our competitors are larger and have substantially greater resources than we do, including higher total assets and capitalization, larger technology and marketing budgets and a broader offering of financial services.
For 2020, we maintained approximately 13.4% of the market share (deposit base) in our entire Mississippi markets, approximately 1.3% in our entire Tennessee markets, approximately 1.4% in our entire Alabama markets, approximately 1.4% in our entire Florida markets and approximately 1.9% in our entire Georgia markets.
Certain markets in which we operate have demographics that we believe indicate the possibility of future growth at higher rates than the remainder of the markets in which we operate. The following table shows our deposit share in those markets as of June 30, 2020 (which is the latest date that such information is available):
| Market | Available Deposits (in billions) |
Deposit
Share |
||||||||||||
| Mississippi | ||||||||||||||
| Tupelo | $ | 3.0 | 45.8 | % | ||||||||||
| DeSoto County | 3.3 | 12.8 | % | |||||||||||
| Oxford | 1.5 | 9.6 | % | |||||||||||
| Columbus | 1.2 | 9.2 | % | |||||||||||
| Starkville | 1.2 | 33.9 | % | |||||||||||
| Jackson | 15.3 | 4.0 | % | |||||||||||
| Tennessee | ||||||||||||||
| Memphis | 32.0 | 2.2 | % | |||||||||||
| Nashville | 65.7 | 1.0 | % | |||||||||||
| Maryville | 2.3 | 3.4 | % | |||||||||||
| Alabama | ||||||||||||||
| Birmingham | 49.7 | 0.6 | % | |||||||||||
| Decatur | 2.4 | 15.3 | % | |||||||||||
| Huntsville/Madison | 9.5 | 1.6 | % | |||||||||||
| Montgomery | 7.5 | 1.5 | % | |||||||||||
| Tuscaloosa | 4.1 | 1.3 | % | |||||||||||
| Florida | ||||||||||||||
| Columbia | 1.5 | 1.7 | % | |||||||||||
| Gainesville | 5.3 | 2.2 | % | |||||||||||
| Ocala | 6.5 | 2.6 | % | |||||||||||
| Georgia | ||||||||||||||
| Alpharetta/Roswell | 10.7 | 2.3 | % | |||||||||||
| Canton/Woodstock | 4.0 | 4.3 | % | |||||||||||
| Cartersville/Cumming | 5.3 | 3.7 | % | |||||||||||
| Gwinnett County | 20.1 | 5.3 | % | |||||||||||
| Lowndes County | 2.5 | 3.3 | % | |||||||||||
Source: FDIC, as of June 30, 2020
Wealth Management
Our Wealth Management segment competes with other banks, brokerage firms, financial advisers and trust companies, which provide one or more of the services and products that we offer. Our wealth management operations compete on the basis of available product lines, rates and fees, as well as reputation and professional expertise. No particular company or group of companies dominates this industry.
Insurance
We encounter strong competition in the markets in which we conduct insurance operations. Through our insurance subsidiary, we compete with independent insurance agencies and agencies affiliated with other banks and/or other insurance carriers. All of these agencies compete in the delivery of personal and commercial product lines. There is no dominant insurance agency in our markets.
7
Supervision and Regulation
General
The U.S. banking industry is highly regulated under federal and state law. We are a bank holding company registered under the Bank Holding Company Act of 1956, as amended (the “BHC Act”). As a result, we are subject to supervision, regulation and examination by the Board of Governors of the Federal Reserve System (the “Federal Reserve”). The Bank is a commercial bank chartered under the laws of the State of Mississippi; it is not a member of the Federal Reserve System. As a Mississippi non-member bank, the Bank is subject to supervision, regulation and examination by the Mississippi Department of Banking and Consumer Finance (the “DBCF”), as the chartering entity of the bank, and by the FDIC, as the insurer of the Bank’s deposits. Under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”), we are subject to examination by the Consumer Financial Protection Bureau (the “CFPB”) for compliance with federal consumer protection laws because we have more than $10 billion in assets.
As a result of this extensive system of supervision and regulation, the growth and earnings performance of the Company and the Bank are affected not only by management decisions and general and local economic conditions, but also by the statutes, rules, regulations and policies administered by the Federal Reserve, the FDIC and the DBCF, as well as by the CFPB and other federal and state regulatory authorities with jurisdiction over our operations.
The bank regulatory scheme has two primary goals: to maintain a safe and sound banking system and to facilitate the conduct of sound monetary policy. This comprehensive system of supervision and regulation is intended primarily for the protection of the FDIC’s deposit insurance fund, bank depositors and the public, rather than our shareholders or creditors. To this end, federal and state banking laws and regulations control, among other things, the types of activities in which we and the Bank may engage, permissible investments, the level of reserves that the Bank must maintain against deposits, minimum equity capital levels, the nature and amount of collateral required for loans, maximum interest rates that can be charged, the manner and amount of the dividends that may be paid, and corporate activities regarding mergers, acquisitions and the establishment of branch offices.
The description below summarizes certain elements of the regulatory framework applicable to us and the Bank. This summary is not, however, intended to describe all laws, regulations and policies applicable to us and the Bank, and the description is qualified in its entirety by reference to the full text of the statutes, regulations, policies, interpretative letters and other written guidance that are described below. Further, the following discussion addresses the regulatory framework as in effect as of the date of this Annual Report on Form 10-K. Legislation and regulatory action to revise federal and Mississippi banking, consumer protection, securities and other applicable laws and regulations, sometimes in a substantial manner, are continually under consideration by the U.S. Congress, state legislatures and federal and state regulatory agencies. Accordingly, the following discussion must be read in light of the enactment of any new federal or state banking laws or regulations or any amendment or repeal of existing laws or regulations, or any change in the policies of the regulatory agencies with jurisdiction over the Company’s operations, after the date of this Annual Report on Form 10-K.
Supervision and Regulation of Renasant Corporation
General
. As a bank holding company registered under the BHC Act, we are subject to the regulation and supervision applicable to bank holding companies by the Federal Reserve. The BHC Act and other federal laws subject bank holding companies to particular restrictions on the types of activities in which they may engage and to a range of supervisory requirements and activities, including regulatory enforcement actions for violations of laws and regulations or engaging in unsafe and unsound banking practices. The Federal Reserve’s jurisdiction also extends to any company that we directly or indirectly control, such as any non-bank subsidiaries and other companies in which we own a controlling investment.
Scope of Permissible Activities
. Under the BHC Act, we are prohibited from engaging directly or indirectly in activities other than those of banking, managing or controlling banks or furnishing services to or performing services for the Bank and from acquiring a direct or indirect interest in or control of more than 5% of the voting shares of any company that is not a bank or financial holding company. The principal exception to this prohibition is that we may engage, directly or indirectly (including through the ownership of shares of another company), in certain activities that the Federal Reserve has found to be so closely related to banking or managing and controlling banks as to be a proper incident thereto. In making determinations whether activities are closely related to banking or managing banks, the Federal Reserve must consider whether the performance of such activities by a bank holding company or its subsidiaries can reasonably be expected to produce benefits to the public, such as greater convenience, increased competition or gains in efficiency of resources, and whether such public benefits outweigh the risks of possible adverse effects, such as decreased or unfair competition, conflicts of interest or unsound banking practices. Currently-permitted activities include, among others, operating a mortgage, finance, credit card or factoring company; providing certain data processing, storage and transmission services; acting as an investment or financial advisor; acting as an insurance agent for certain types of credit-related insurance; leasing personal or real property on a nonoperating basis; and providing certain stock brokerage services.
8
Pursuant to the amendment to the BHC Act effected by the Financial Services Modernization Act of 1999 (commonly referred to as the Gramm-Leach Bliley Act, or the “GLB Act”), a bank holding company whose subsidiary deposit institutions are “well capitalized” and “well managed” may elect to become a “financial holding company” (“FHC”) and thereby engage without prior Federal Reserve approval in certain banking and non-banking activities that are deemed to be financial in nature or incidental to financial activity. These “financial in nature” activities include securities underwriting, dealing and market making; organizing, sponsoring and managing mutual funds; insurance underwriting and agency activities; merchant banking activities; and other activities that the Federal Reserve has determined to be closely related to banking. No regulatory approval is required for a financial holding company to acquire a company, other than a bank or savings association, engaged in activities that are financial in nature or incidental to activities that are financial in nature, as determined by the Federal Reserve. We have not elected to become an FHC.
A dominant theme of the GLB Act is functional regulation of financial services, with the primary regulator of the Company or its subsidiaries being the agency that traditionally regulates the activity in which the Company or its subsidiaries wish to engage. For example, the Securities and Exchange Commission (“SEC”) regulates bank holding company securities transactions, and the various banking regulators oversee our banking activities.
Capital Adequacy Guidelines
. The Federal Reserve has adopted risk-based capital guidelines for bank holding companies. The risk-based capital guidelines are designed to make regulatory capital requirements more sensitive to differences in risk profiles among banks and bank holding companies, to factor off-balance sheet exposure into the assessment of capital adequacy, to minimize disincentives for holding liquid, low-risk assets and to achieve greater consistency in the evaluation of the capital adequacy of major banking organizations worldwide. Under these guidelines, assets and off-balance sheet items are assigned to broad risk categories, each with appropriate weights. The resulting capital ratios represent capital as a percentage of total risk-weighted assets and off-balance sheet items. These requirements apply on a consolidated basis to bank holding companies with consolidated assets of $500 million or more, such as the Company. In addition to the risk-based capital guidelines, the Federal Reserve has adopted a minimum Tier 1 capital (leverage) ratio, under which a bank holding company must maintain a minimum level of Tier 1 capital to average total consolidated assets of at least 4%.
The capital requirements applicable to the Company are substantially similar to those imposed on the Bank under FDIC regulations, described below under the heading “Supervision and Regulation of Renasant Bank - Capital Adequacy Guidelines.”
Payment of Dividends; Source of Strength
. Under Federal Reserve policy, in general a bank holding company should pay dividends only when (1) its net income available to shareholders over the last four quarters (net of dividends paid) has been sufficient to fully fund the dividends, (2) the prospective rate of earnings retention appears to be consistent with the capital needs and overall current and prospective financial condition of the bank holding company and its subsidiaries and (3) the bank holding company will continue to meet minimum regulatory capital adequacy ratios after giving effect to the dividend.
In July 2020, the Federal Reserve provided guidance regarding its criteria for evaluating a bank holding company’s request to pay dividends in an aggregate amount that will exceed the company’s earnings for the period in which the dividends will be paid.
For purposes of this analysis, “dividend” includes not only dividends on preferred and common equity but also dividends on debt underlying trust preferred securities and other Tier 1 capital instruments. The criteria evaluates whether the holding company (1) has net income over the past four quarters sufficient to fully fund the proposed dividend (taking into account prior dividends paid during this period), (2) is considering stock repurchases or redemptions in the quarter, (3) does not have a concentration in commercial real estate and (4) is in good supervisory condition, based on its overall condition and its asset quality risk.
A holding company not meeting these criteria will require more in-depth consultations with the Federal Reserve.
In addition, a bank holding company is required to serve as a source of financial strength to its subsidiary banks. This means that we are expected to use available resources to provide adequate financial resources to the Bank, including during periods of financial stress or adversity, and to maintain the financial flexibility and capital-raising capacity to obtain additional resources for assisting the Bank where necessary. In addition, any capital loans that we make to the Bank are subordinate in right of payment to deposits and to certain other indebtedness of the Bank. In the event of our bankruptcy, any commitment by us to a federal bank regulatory agency to maintain the capital of the Bank will be assumed by the bankruptcy trustee and entitled to a priority of payment.
Acquisitions by Bank Holding Companies
. The BHC Act requires every bank holding company to obtain the prior approval of the Federal Reserve before it acquires all or substantially all of the assets of any bank, merges or consolidates with another bank holding company or acquires ownership or control of any voting shares of any bank if after such acquisition it would own or control, directly or indirectly, more than 5% of the voting shares of such bank. The Federal Reserve will not approve any acquisition, merger or consolidation that would have a substantially anti-competitive effect, unless the anti-competitive impact of the proposed transaction is clearly outweighed by a greater public interest in meeting the convenience and needs of the
9
community to be served. The Federal Reserve also considers capital adequacy and other financial and managerial resources and future prospects of the companies and the banks concerned, together with the convenience and needs of the community to be served and the record of the bank holding company and its subsidiary bank(s) in combating money laundering activities. Finally, in order to acquire banks located outside their home state, a bank holding company and its subsidiary institutions must be “well capitalized” and “well managed.” In addition, as detailed under the heading “Scope of Permissible Activities” above, we cannot acquire direct or indirect control of more than 5% of the voting shares of a company engaged in non-banking activities.
Control Acquisitions
. Federal and state laws, including the BHC Act and the Change in Bank Control Act, also impose prior notice or approval requirements and ongoing regulatory requirements on any investor that seeks to acquire direct or indirect “control” of an FDIC-insured depository institution or bank holding company. “Control” of a depository institution is a facts and circumstances analysis, but generally an investor is deemed to control a depository institution or other company if the investor owns or controls 25% or more of any class of voting securities. Ownership or control of 5% or more of any class of voting securities and more than one-third of the total equity of a depository institution or bank holding company is also presumed to result in the investor controlling the depository institution or other company, although this is subject to rebuttal.
Anti-Tying Restrictions
. Bank holding companies and their affiliates are prohibited from tying the provision of certain services, such as extensions of credit, to other nonbanking services offered by a bank holding company or its affiliates.
Status as a Public Company
. As a publicly-traded company, we are also subject to laws, rules and regulations, as well as the standards of self-regulatory organizations, relating to corporate governance, financial reporting and public disclosure, and auditor independence, including the Sarbanes-Oxley Act of 2002, the Dodd-Frank Act, SEC rules and regulations and Nasdaq listing rules. We incur significant expense in, and devote substantial management time and attention to, complying with these laws, regulations and standards, which are subject to varying interpretations, amendment or outright repeal. We are committed to maintaining high standards of corporate governance, financial reporting and public disclosure, and management continually monitors changes in laws, rules and regulations, as well as best practices, in this area to ensure that we fulfill this commitment.
Supervision and Regulation of Renasant Bank
General
. As a Mississippi-chartered bank, the Bank is subject to the regulation and supervision of the DBCF. As an FDIC-insured institution that is not a member of the Federal Reserve, the Bank is subject to the regulation and supervision of the FDIC. The regulations of the FDIC and the DBCF affect virtually all of the Bank’s activities, including the minimum levels of capital required, the ability to pay dividends, mergers and acquisitions, borrowing and the ability to expand through new branches or acquisitions and various other matters. Finally, having more than $10 billion in assets, our compliance with federal consumer protection laws is subject to examination by the CFPB.
Insurance of Deposits
. The deposits of the Bank are insured through the Deposit Insurance Fund (the “DIF”) up to $250,000 for most accounts. The FDIC administers the DIF, and the FDIC must by law maintain the DIF at an amount equal to a specified percentage of the estimated annual insured deposits or assessment base. The minimum designated reserve ratio of the DIF is currently 1.35% of total insured deposits. The FDIC must offset the effect of this increase for banks with assets less than $10 billion, meaning that banks above such asset threshold, such as the Bank, will bear the cost of the increase.
To fund the DIF, FDIC-insured banks are required to pay deposit insurance assessments to the FDIC on a quarterly basis. The amount of an institution’s assessment is based on its average consolidated total assets less its average tangible equity during the assessment period. As to the rate, it is based on risk classification. An institution’s risk classification is assigned based on its capital levels and the level of supervisory concern that the institution poses to the regulators. The higher an institution’s risk classification, the higher its assessment rate (on the assumption that such institutions pose a greater risk of loss to the DIF). In addition, the FDIC can impose special assessments in certain instances. As we have assets in excess of $10 billion, our assessment rate is based not only on our risk classification but also incorporates forward-looking measures. Also, we are subject to a surcharge designed to increase the DIF to specified levels, although this surcharge is not currently applicable because the DIF is sufficiently funded.
The FDIC may terminate the deposit insurance of any insured depository institution, including the Bank, if it determines after a hearing that the institution has engaged or is engaging in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, order or any condition imposed by an agreement with the FDIC. For an institution with no tangible capital, deposit insurance may be temporarily suspended during the hearing process for the permanent termination of insurance. If the FDIC terminates an institution’s deposit insurance, accounts insured at the time of the termination, less withdrawals, will continue to be insured for a period of six months to two years, as determined by the FDIC. We are not aware of any existing circumstances that would result in termination of the Bank’s deposit insurance.
10
Interstate Banking and Branching
. Under federal and Mississippi law, the Bank may establish additional branch offices within Mississippi, subject to the approval of the DBCF, and the Bank can also establish additional branch offices outside Mississippi, subject to prior regulatory approval, so long as the laws of the state where the branch is to be located would permit a state bank chartered in that state to establish a branch. Finally, the Bank may also establish offices in other states by merging with banks or by purchasing branches and related assets of banks in other states, subject to certain restrictions.
Dividends
. The restrictions and guidelines with respect to the Company’s payment of dividends are described above. As a practical matter, for so long as our operations chiefly consist of ownership of the Bank, the Bank will remain our source of dividend payments. Accordingly, our ability to pay dividends depends upon the Bank's earnings and financial condition, as well as upon general economic conditions and other factors, and will be subject to any restrictions applicable to the Bank.
The ability of the Bank to pay dividends is restricted by federal and state laws, regulations and policies. Under Mississippi law, a Mississippi bank may not pay dividends unless its earned surplus is in excess of three times capital stock. A Mississippi bank with earned surplus in excess of three times capital stock may pay a dividend, subject to the approval of the DBCF. In addition, the FDIC also has the authority to prohibit the Bank from engaging in business practices that the FDIC considers to be unsafe or unsound, which, depending on the financial condition of the Bank, could include the payment of dividends. Federal Reserve regulations also limit the amount the Bank may loan to the Company unless such loans are collateralized by specific obligations.
Capital Adequacy Guidelines
. The FDIC has promulgated risk-based capital guidelines similar to, and with the same underlying purposes as, those established by the Federal Reserve with respect to bank holding companies. Under those guidelines, assets and off-balance sheet items are assigned to broad risk categories, each with appropriate weights. The resulting capital ratios represent capital as a percentage of total risk-weighted assets and off-balance sheet items.
Capital requirements for insured depository institutions are countercyclical, such that capital requirements increase in times of economic expansion and decrease in times of economic contraction.
-
Current Guidelines
. Under the current risk-based capital adequacy guidelines, we are required to maintain (1) a ratio of common equity Tier 1 capital (“CET1”) to total risk-weighted assets of not less than 4.5%; (2) a minimum leverage capital ratio of 4%; (3) a minimum Tier 1 risk-based capital ratio of 6%; and (4) a minimum total risk-based capital ratio of 8%. CET1 generally consists of common stock, retained earnings, accumulated other comprehensive income and certain minority interests, less certain adjustments and deductions. In addition, we must maintain a “capital conservation buffer,” which is a specified amount of CET1 capital in addition to the amount necessary to meet minimum risk-based capital requirements. The capital conservation buffer is designed to absorb losses during periods of economic stress. If our ratio of CET1 to risk-weighted capital is below the capital conservation buffer, we will face restrictions on our ability to pay dividends, repurchase our outstanding stock and make certain discretionary bonus payments. The required capital conservation buffer is 2.5% of CET1 to risk-weighted assets in addition to the amount necessary to meet minimum risk-based capital requirements.
In addition, the Federal Reserve, the FDIC and the Office of the Comptroller of the Currency rules for calculating risk-weighted assets have been revised in recent years to enhance risk sensitivity and to incorporate certain international capital standards of the Basel Committee on Banking Supervision. These revisions affect the calculation of the denominator of a banking organization’s risk-based capital ratios to reflect the higher-risk nature of certain types of loans.
For example, residential mortgages are risk-weighted between 35% and 200%, depending on the mortgage’s loan-to-value ratio and whether the mortgage falls into one of two categories based on eight criteria that include the term, use of negative amortization and balloon payments, certain rate increases and documented and verified borrower income, while a 150% risk weight applies to both certain high volatility commercial real estate acquisition, development and construction loans as well as non-residential mortgage loans 90 days past due or on nonaccrual status (in both cases, as opposed to the former 100% risk weight). Also, “hybrid” capital items like trust preferred securities no longer enjoy Tier 1 capital treatment, subject to various grandfathering and transition rules. We and the Bank meet all minimum capital requirements as currently in effect, and our grandfathered trust preferred securities qualify for Tier 1 capital treatment.
For a detailed discussion of the Company’s capital ratios, see Note 22, “Regulatory Matters,” in the Notes to Consolidated Financial Statements in Item 8, Financial Statements and Supplementary Data, in this report.
-
Prompt Corrective Action
. Under Section 38 of the Federal Deposit Insurance Act (the “FDIA”), each federal banking agency is required to implement a system of prompt corrective action for institutions that it regulates. The federal banking agencies (including the FDIC) have adopted substantially similar regulations to implement this mandate. Under current regulations, a bank is (1) “well capitalized” if it has total risk-based capital of 10% or more, has a Tier 1 risk-based ratio of 8% or more, has a common equity Tier 1 capital ratio of 6.5%, has a Tier 1 leverage capital ratio of 5% or more and is not subject to any order or final capital directive to meet and maintain a specific capital level for any capital measure, (2) “adequately
11
capitalized” if it has a total risk-based capital ratio of 8% or more, a Tier 1 risk-based capital ratio of 6% or more, a common equity Tier 1 capital ratio of 4.5% and a Tier 1 leverage capital ratio of 4% or more (3% under certain circumstances) and does not meet the definition of “well capitalized,” (3) “undercapitalized” if it has a total risk-based capital ratio that is less than 8%, a Tier 1 risk-based capital ratio that is less than 6%, a common equity Tier 1 capital ratio that is less than 4.5% or a Tier 1 leverage capital ratio that is less than 4%, (4) “significantly undercapitalized” if it has a total risk-based ratio that is less than 6%, a Tier 1 risk-based capital ratio that is less than 4%, a common equity Tier 1 capital ratio of less than 3% or a Tier 1 leverage capital ratio that is less than 3%, and (5) “critically undercapitalized” if it has a ratio of tangible equity to total assets that is equal to or less than 2%.
The capital classification of a bank affects the frequency of regulatory examinations, the bank’s ability to engage in certain activities and the deposit insurance premiums paid by the bank. In addition, federal banking regulators must take various mandatory supervisory actions, and may take other discretionary actions, with respect to institutions in the three undercapitalized categories. The severity of the action depends upon the capital category in which the institution is placed. An institution that is categorized as undercapitalized, significantly undercapitalized or critically undercapitalized is required to submit an acceptable capital restoration plan to its appropriate federal banking agency. An undercapitalized institution also is generally prohibited from increasing its average total assets, making acquisitions, establishing any branches or engaging in any new line of business, except under an accepted capital restoration plan or with FDIC approval. Generally, banking regulators must appoint a receiver or conservator for an institution that is critically undercapitalized.
Section 38 of the FDIA and related regulations also specify circumstances under which the FDIC may reclassify a well-capitalized bank as adequately capitalized and may require an adequately capitalized bank or an undercapitalized bank to comply with supervisory actions as if it were in the next lower category (except that the FDIC may not reclassify a significantly undercapitalized bank as critically undercapitalized).
The provisions discussed above, as well as any other aspects of current or proposed regulatory or legislative changes to laws applicable to the financial industry, may impact the profitability of our business activities and may change certain of our business practices, including the ability to offer new products, obtain financing, attract deposits, make loans, and achieve satisfactory interest spreads, and could expose us to additional costs, including increased compliance costs. These changes also may require us to invest significant management attention and resources to make any necessary changes to operations in order to comply, and could therefore also materially and adversely affect our business, financial condition and results of operations.
Interchange Fees
. Under Section 1075 of the Dodd-Frank Act (often referred to as the “Durbin Amendment”), the Federal Reserve established standards for assessing whether the interchange fees, or “swipe” fees, that banks charge for processing electronic payment transactions are “reasonable and proportional” to the costs incurred by issuers for processing such transactions. Under the Federal Reserve’s rules, the maximum permissible interchange fee is no more than 21 cents plus 5 basis points of the transaction value for many types of debit interchange transactions. A debit card issuer may also recover one cent per transaction for fraud prevention purposes if the issuer develops and implements policies and procedures reasonably designed to achieve certain fraud-prevention standards. The Federal Reserve also has rules governing routing and exclusivity that require issuers to offer two unaffiliated networks for routing transactions on each debit or prepaid product. The Bank became subject to the interchange fee cap beginning July 1, 2019.
Activities and Investments of Insured State-Chartered Banks
. Section 24 of the FDIA generally limits the activities and equity investments of FDIC-insured, state-chartered banks to those that are permissible for national banks. Under regulations dealing with equity investments, an insured state bank generally may not directly or indirectly acquire or retain any equity investment of a type, or in an amount, that is not permissible for a national bank. An insured state bank is not prohibited from, among other things, taking the following actions:
| - | acquiring or retaining a majority interest in a subsidiary; | ||||
| - | investing as a limited partner in a partnership the sole purpose of which is direct or indirect investment in the acquisition, rehabilitation or new construction of a qualified housing project, provided that such limited partnership investments may not exceed 2% of the bank’s total assets; | ||||
| - | acquiring up to 10% of the voting stock of a company that solely provides or reinsures directors’, trustees’ and officers’ liability insurance coverage or bankers’ blanket bond group insurance coverage for insured depository institutions; and | ||||
| - | acquiring or retaining the voting shares of a depository institution if certain requirements are met. | ||||
Under FDIC regulations, insured banks engaging in impermissible activities, or banks that wish to engage in otherwise impermissible activities, may seek approval from the FDIC to continue or commence such activities, as the case may be. The FDIC will not approve such an application if the bank does not meet its minimum capital requirements or the proposed activities present a significant risk to the deposit insurance fund.
12
100/300 Test
. In response to rapid growth in commercial real estate (“CRE”) loan concentrations and observed weaknesses in risk management practices at some financial institutions, the FDIC, the Federal Reserve, and the Office of the Comptroller of the Currency published Joint Guidance on Concentrations in Commercial Real Estate Lending, Sound Risk Management Practices (which we refer to as the “CRE guidance”). The CRE guidance is intended to promote sound risk management practices and appropriate levels of capital to enable institutions to engage in CRE lending in a safe and sound manner. Federal banking regulators use certain criteria to identify financial institutions that are potentially exposed to significant CRE concentration risk. Among other things, an institution will be deemed to potentially have significant CRE concentration risk exposure if, based on its call report, either (1) total loans classified as acquisition, development and construction (“ADC”) loans represent 100% or more of the institution’s total capital or (2) total CRE loans, which consists of ADC and non-owner occupied CRE loans as defined in the CRE guidance, represent 300% or more the institution’s total capital, where the balance of the institution’s CRE loan portfolio has increased by 50% or more during the prior 36 months. The foregoing criteria are commonly referred to as the 100/300 Test. As of December 31, 2020, our ADC loans represented 76% of our total bank level capital, and our total CRE loans represented 259% of our total bank level capital.
Safety and Soundness
. The federal banking agencies, including the FDIC, have implemented rules and guidelines concerning standards for safety and soundness required pursuant to Section 39 of the FDIA. In general, the standards relate to operational and managerial matters, asset quality and earnings and compensation. The operational and managerial standards cover (1) internal controls and information systems, (2) internal audit systems, (3) loan documentation, (4) credit underwriting, (5) interest rate exposure, (6) asset growth and (7) compensation, fees and benefits. Under the asset quality and earnings standards, the Bank must establish and maintain systems to identify problem assets and prevent deterioration in those assets and to evaluate and monitor earnings and ensure that earnings are sufficient to maintain adequate capital reserves. The compensation standard states that compensation will be considered excessive if it is unreasonable or disproportionate to the services actually performed by the individual being compensated.
If an insured state-chartered bank fails to meet any of the standards promulgated by regulation, then such institution will be required to submit a plan to the FDIC specifying the steps it will take to correct the deficiency. In the event that an insured state-chartered bank fails to submit or fails in any material respect to implement a compliance plan within the time allowed by the federal banking agency, Section 39 of the FDIA provides that the FDIC must order the institution to correct the deficiency. The FDIC may also (1) restrict asset growth; (2) require the bank to increase its ratio of tangible equity to assets; (3) restrict the rates of interest that the bank may pay; or (4) take any other action that would better carry out the purpose of prompt corrective action. We believe that the Bank has been and will continue to be in compliance with each of these standards.
Federal Reserve System
. The Federal Reserve requires all depository institutions to maintain reserves against their transaction accounts (primarily NOW and Super NOW checking accounts) and non-personal time deposits. The required reserves must be maintained in the form of vault cash or an account at a Federal Reserve bank. However, in March 2020, due to a shift in its operating framework, the Federal Reserve reduced the reserve requirements to zero percent, effectively eliminating the Bank’s reserve requirements.
Consumer Financial Products and Services
. We are subject to a broad array of federal and state laws designed to protect consumers in connection with our lending activities, including the Equal Credit Opportunity Act, the Fair Credit Reporting Act, the Truth in Lending Act, the Truth in Savings Act, the Home Mortgage Disclosure Act, the Real Estate Settlement Procedures Act, the Electronic Funds Transfer Act, and, in some cases, their respective state law counterparts. The CFPB, which is an independent bureau within the Federal Reserve, has broad regulatory, supervisory and enforcement authority over our offering and provision of consumer financial products and services under these laws.
Relating to mortgage lending in particular, the CFPB issued regulations governing the ability to repay, qualified mortgages, mortgage servicing, appraisals and compensation of mortgage lenders. These regulations limit the type of mortgage products that the Bank can offer; they also affect our ability to enforce delinquent mortgage loans. The CFPB has also issued complex rules integrating the required disclosures under the Truth in Lending Act, the Truth in Savings Act and the Real Estate Settlement Procedures Act (the “TRID rules”). The TRID rules combine the prior good faith estimate and truth in lending disclosure form into a new “loan estimate” form and combine the HUD-1 and final truth in lending disclosure forms into a new “closing disclosure” form.
We have established numerous controls and procedures designed to ensure that we fully comply with the TRID rules and all other consumer protection laws, both federal and state, as they are currently interpreted (which interpretations are subject to change by the CFPB). In addition, our employees undergo at least annual training to ensure that they remain aware of consumer protection laws and the activities mandated, or prohibited, thereunder.
Community Reinvestment Act
. Under the Community Reinvestment Act (the “CRA”), the FDIC assesses the Bank’s record in meeting the credit needs of its entire community, including low- and moderate-income neighborhoods. The FDIC’s assessment
13
is taken into account when evaluating any application we submit for, among other things, approval of the acquisition or establishment of a branch or other deposit facility, an office relocation, a merger or the acquisition of shares of capital stock of another financial institution. Under the CRA, institutions are assigned a rating of “outstanding,” “satisfactory,” “needs to improve,” or “unsatisfactory.” The Bank has undertaken significant actions to comply with the CRA, and it received a “satisfactory” rating by the FDIC with respect to its CRA compliance in its most recent assessment.
The Office of the Comptroller of the Currency recently implemented substantial changes to the CRA rules and regulations applicable to national banks.
Neither the Federal Reserve Board nor the FDIC joined the Office of the Comptroller of the Currency in revising the CRA rules and regulations applicable to the financial institutions subject to their respective supervision, although the FDIC has generally acknowledged the need for updates to the CRA rules and regulations. In addition, the U.S. Congress and all banking regulatory agencies have proposed changes to fair lending laws. We will continue to evaluate the impact of any changes to the regulations governing the CRA and fair lending and their impact to our financial condition, results of operations, and/or liquidity.
Financial and State Privacy Requirements
. Federal law and regulations limit a financial institution’s ability to share a customer’s financial information with unaffiliated third parties and otherwise contain extensive protections for a customer’s private information. Specifically, these provisions require all financial institutions offering financial products or services to retail customers to provide such customers with the financial institution’s privacy policy at the beginning of the relationship and annually thereafter. Further, such customers must be given the opportunity to “opt out” of the sharing of personal financial information with unaffiliated third parties. The sharing of information for marketing purposes is also subject to limitations. In addition to law and regulation at the federal level, a number of states - some of which we have loan or deposit customers in - have enacted broad statutes governing the use of an individual’s personal information. These statutes typically encompass a broader scope of personal information than the financial information covered by federal privacy laws and regulations, and the statutes generally place more stringent restrictions on the ability of a third party to disclose, share or otherwise use an individual’s personal information than exist under federal law and regulations. Many of these states’ privacy laws and regulations impose severe penalties for violations.
The Bank has adopted a privacy policy and implemented procedures governing the use and disclosure of personal financial information for both customers and non-customers. We believe our policy and procedures currently comply with all applicable laws and regulations, and we continually monitor federal and state laws, as well as changes in the nature and scope of our operations, so that any necessary changes in our privacy policy and procedures can be enacted in a timely manner.
Anti-Money Laundering
. Federal anti-money laundering rules impose various requirements on financial institutions intended to prevent the use of the U.S. financial system to fund terrorist activities. These provisions include a requirement that financial institutions operating in the United States have anti-money laundering compliance programs, due diligence policies and controls to ensure the detection and reporting of money laundering. Such compliance programs supplement existing compliance requirements, also applicable to financial institutions, under the Bank Secrecy Act and the Office of Foreign Assets Control regulations. The Bank has established policies and procedures to ensure compliance with federal anti-money laundering laws and regulations.
The Volcker Rule
. The Federal Reserve and the other federal banking regulators as well as the SEC each adopted a rule, commonly referred to as the “Volcker Rule,” implementing Section 619 of the Dodd-Frank Act.
Generally speaking, the Volcker rule prohibits a bank and its affiliates from engaging in proprietary trading and from acquiring or retaining ownership interests in, sponsoring, or having relationships with certain “covered funds,” including certain hedge funds and private equity funds.
The Volcker Rule does not impact any of our current activities, but it does limit the scope of permissible activities in which we might engage in the future.
Supervision and Regulation of our Wealth Management and Insurance Operations
Our Wealth Management and Insurance operations are subject to licensing requirements and regulation under the laws of the United States and the states in which they operate. The laws and regulations are primarily for the benefit of clients. In all jurisdictions, the applicable laws and regulations are subject to amendment by regulatory authorities. Generally, such authorities are vested with relatively broad discretion to grant, renew and revoke licenses and approvals and to implement regulations. Licenses may be denied or revoked for various reasons, including the violation of such regulations, conviction of crimes and the like. Other possible sanctions which may be imposed for violation of regulations include suspension of individual employees, limitations on engaging in a particular business for a specified period of time, censures and fines.
14
Monetary Policy and Economic Controls
We and the Bank are affected by the policies of regulatory authorities, including the Federal Reserve. An important function of the Federal Reserve is to regulate the national supply of bank credit in order to stabilize prices. Among the instruments of monetary policy used by the Federal Reserve to implement these objectives are open market operations in U.S. Government securities and changes in the discount rate on bank borrowings. These instruments are used in varying degrees to influence overall growth of bank loans, investments and deposits and may also affect interest rates charged on loans or paid for deposits.
The monetary policies of the Federal Reserve have had a significant effect on the operating results of commercial banks in the past and are expected to do so in the future. In view of changing conditions in the national economy and in the various money markets, as well as the effect of actions by monetary and fiscal authorities including the Federal Reserve, the effect on our, and the Bank’s, future business and earnings cannot be predicted with accuracy.
Sources and Availability of Funds
The funds essential to our, and the Bank’s, business consist primarily of funds derived from customer deposits, loan repayments, cash flows from our investment securities, securities sold under repurchase agreements, Federal Home Loan Bank advances and subordinated notes. The availability of such funds is primarily dependent upon the economic policies of the federal government, the economy in general and the general credit market for loans. Additional information about our funding sources can be found under the heading "Liquidity and Capital Resources" in Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, in this report.
Human Capital Resources
Employees of the Company represent its greatest asset. At December 31, 2020, we employed 2,524 people throughout all of our segments on a full-time equivalent basis. Of this total, the Bank accounted for 2,458 employees (inclusive of employees in our Community Banks and Wealth Management segments), and Renasant Insurance employed 66 individuals. The Company has no additional employees. At December 31, 2020, 18 employees of the Bank served as officers of the Company in addition to their positions with the Bank.
Early in 2020, we implemented personnel policies and procedures intended to minimize exposure to COVID-19, such as remote work, adjusted staffing levels, the reconfiguration of our workplaces and additional sanitation and safety protocols for those employees who are not able to work remotely, all of which remain in place. We also enhanced our paid leave practices to address illness, caretaking, isolation after exposure and school closures and other unanticipated childcare emergencies. We continue to evaluate the needs of our workforce as the COVID-19 pandemic evolves, and we are committed to responding as circumstances change.
During 2020, the Company offered a voluntary early retirement window program to a select group of employees (called the “VERP”), which was intended to create longer-term efficiencies related to the management of our personnel. Eligible employees who voluntarily retired on or before December 31, 2020 and satisfied other program conditions received, among other items, cash payments, retiree medical coverage and, if otherwise a participant, accelerated payouts from the Company’s defined benefit pension plan.
The Company also established a Social Responsibility Diversity and Inclusion Committee (referred to as the “SRDI Committee”), consisting of four permanent members and four rotating members, with the mandate to address inclusion and diversity in the workplace and among the Company’s vendors and suppliers. During 2020, the SRDI Committee evaluated the Company’s existing policies and practices addressing inclusion and diversity and adopted a broader, long-range strategic plan. The plan has been approved and implementation has begun.
Available Information
We file annual, quarterly and current reports, proxy statements and other information with the SEC under the Securities Exchange Act of 1934, as amended. Our SEC filings are available to the public at the SEC’s website at www.sec.gov. Our Internet address is www.renasant.com, and the Bank’s Internet address is www.renasantbank.com. We make available at the Company’s website, at the “SEC Filings” link, free of charge, our Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC.
15
ITEM 1A. RISK FACTORS
In addition to the other information contained in or incorporated by reference into this Form 10-K and the exhibits hereto, the following risk factors should be considered carefully in evaluating our business. The risks disclosed below, either alone or in combination, could materially adversely affect the business, financial condition or results of operations of the Company.
Risks Related to Our Industry
The ongoing COVID-19 pandemic and measures intended to arrest the virus’s spread have adversely affected, and are expected to continue to adversely affect, the Company.
The spread of the COVID-19 virus has created a global public health crisis that has resulted in unprecedented uncertainty, volatility and disruption in financial markets and in governmental, commercial and consumer activity in the United States and globally. In an effort to prevent the further spread of the virus, federal and state governments, including state and local governments in the markets in which we operate, have imposed various levels of restrictions on all businesses and the activities of individuals outside their residences, ranging from the required closure of “non-essential” businesses at the onset of the pandemic and restrictions on the number of customers that a business may allow inside its premises to orders mandating that all individuals wear protective face coverings and observe social distancing in all instances. In addition, most businesses, including the Company, have taken steps to protect the health and well-being of their customers and employees and to promote efforts to limit the transmission of the disease, and these steps, to varying degrees, have limited the normal operations of these businesses. These actions (including those that remain in place and those that have lapsed as of the date hereof) by federal and state governments, businesses and individuals have had, and continue to have, a severe negative impact on the global and United States economies as well as the local economies across our footprint. The United States economy and the Company's markets in particular continue to experience depressed commercial and consumer activity and changes in the manner of conducting permitted activities, elevated levels of unemployment, disrupted U.S. and global supply chains, increased volatility as well as other disruptions in the financial markets and credit deterioration in many industries. The ongoing impact of the pandemic may in turn have a material and adverse effect on our business, financial condition, results of operations, liquidity, asset quality, capital, cash flows and prospects. Furthermore, additional measures taken in the future to address the pandemic by government, businesses in general and the Company may exacerbate the economic impact of the pandemic on us, especially if the current level of restrictions on business activity fails to arrest the ongoing spread of the COVID-19 virus and stimulus payments provided to individuals by the federal government do not have the intended impact on the United States economy.
Federal and state governments have taken unprecedented actions to assist businesses and individuals impacted by the COVID-19 virus and to stabilize the financial markets and otherwise limit the impact of the pandemic on the economy as a whole, and additional legislation and other actions are likely to continue to be contemplated until the pandemic is over. The Company has implemented measures to assist its qualified commercial and consumer clients by allowing deferrals on principal and interest payments on loans. It is unclear at this time how successful, if at all, these past, present and future governmental actions as well as the Company’s own efforts will be in supporting businesses and individuals, the markets and the broader economy over the long term and generally ameliorating the impact of the COVID-19 virus on the United States as a whole and the particular markets in which we operate. In the meantime, these governmental actions, along with the steps the Company has taken, may have a material adverse effect on our business, financial condition, results of operations, liquidity, asset quality, capital, cash flows and prospects. In addition, the Company faces an increased risk of litigation and governmental and regulatory scrutiny as a result of the effects of the pandemic on market and economic conditions and actions governmental authorities take in response to those conditions.
The extent to which the pandemic impacts our
business, financial condition, results of operations, liquidity, asset quality, capital, cash flows and prospects
ultimately depends on
the duration of the pandemic, the pace at which the vaccines being deployed to prevent the spread of the pandemic can be distributed and administered in our markets, and the effectiveness of the measures implemented and to be implemented by governments and businesses, including the Company, to address the pandemic and the time it will take the global, national and local economies to recover to their pre-pandemic levels, all of which are
highly uncertain and cannot be predicted at this time. Further, there can be no assurance that any of these efforts will be effective.
In the meantime, until the effects of the pandemic subside, we expect continued draws on lines of credit, reduced revenues in our business, and increased customer defaults. As described above in the “Risk Management” section in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, of this Form 10-K, the Company significantly increased its allowance for credit losses in 2020, and the impact of the pandemic may result in further increases to our allowance for credit losses. Even after the pandemic has subsided, we may continue to experience adverse impacts to our business, financial condition, results of operations, liquidity, asset quality, capital, cash flows and prospects, which could be material, as a result of the economic impact and any recession that has occurred or may occur in the future.
The COVID-19 virus has also resulted in heightened operational risks. A significant portion of our workforce is currently working remotely, and increased levels of remote access create additional cybersecurity risk and opportunities for cybercriminals to exploit vulnerabilities. Cybercriminals may increase their attempts to compromise business emails, including an increase in phishing attempts, and fraudulent vendors or other parties may view the pandemic as an opportunity to prey upon
16
consumers and businesses during this time. This could result in increased fraud losses to us or our customers. The increase in online and remote banking activities may also increase the risk of fraud in certain instances. In addition, state and local orders and regulations limiting the conduct of in-person business operations may impact our ability to operate at normal levels and to restore operations to their pre-pandemic level for an unknown period of time. Separately, our third-party service providers have also been impacted by the pandemic, and we have experienced some disruption to certain services performed by vendors. To date, these disruptions have not been material and we have developed solutions to work around these disruptions, but we may experience additional disruption in the future, which could adversely impact our business.
We are subject to lending risk.
There are inherent risks associated with our lending activities. These risks include, among other things, the impact of changes in interest rates and changes in the economic conditions in the markets where we operate as well as those across the United States. Increases in interest rates on loans and/or weakening economic conditions could adversely impact the ability of borrowers to repay outstanding loans or the value of the collateral securing these loans.
As of December 31, 2020, approximately 69.57% of our loan portfolio consisted of C&I, construction and commercial real estate loans, excluding loans under the Paycheck Protection Program (“PPP”). These types of loans are generally viewed as having more risk to our financial condition than other types of loans due primarily to the large amounts loaned to individual borrowers. Because the loan portfolio contains a significant number of C&I, construction and commercial real estate loans with relatively large balances, the deterioration of one or a few of these loans could cause a significant increase in nonperforming loans. An increase in nonperforming loans could result in a net loss of earnings from these loans, an increase in the provision for credit losses and an increase in loan charge-offs, all of which could have a material adverse effect on our financial condition and results of operations.
Our C&I, construction and commercial real estate loan portfolios are discussed in more detail under the heading “Operations – Operations of Community Banks” in Item 1, Business, in this report.
Our allowance for credit losses may be insufficient, and we may be required to further increase our provision for credit losses.
Although we try to maintain diversification within our loan portfolio in order to minimize the effect of economic conditions within a particular industry, management also maintains an allowance for credit losses, which is a reserve established through a provision for credit losses on loans charged to expense, to absorb credit losses inherent in the entire loan portfolio. The credit loss estimation process involves procedures to appropriately consider the unique characteristics of the Company’s loan portfolio segments. Credit quality is assessed and monitored by evaluating various attributes, and the results of those evaluations are utilized in underwriting new loans and in the Company’s process for the estimation of expected credit losses. Credit quality monitoring procedures and indicators can include an assessment of problem loans, the types of loans, historical loss experience, new lending products, emerging credit trends, changes in the size and character of loan categories and other factors, including the Company’s risk rating system, regulatory guidance and economic conditions, such as the unemployment rate and GDP growth in the markets in which the Company operates, as well as trends in the market values of underlying collateral securing loans, all as determined based on input from management, loan review staff and other sources. This evaluation is complex and inherently subjective, as it requires estimates by management that are inherently uncertain and therefore susceptible to significant revision as more information becomes available. In future periods, evaluations of the overall loan portfolio, in light of the factors and forecasts then prevailing, may result in significant changes in the allowance and provision for credit losses in those future periods.
The 2008-2009 recession, and then subsequently the COVID-19 pandemic, in the United States highlighted the inherent difficulty in estimating with precision the extent to which credit risks and future trends need to be addressed through a provision to our allowance for credit losses. Any deterioration of current and future economic conditions could cause us to experience higher than normal delinquencies and credit losses. As a result, we may be required to make further increases in our provision for credit losses and to charge off additional loans in the future, which could materially adversely affect our financial condition and results of operations.
In addition, bank regulatory agencies periodically review the allowance for credit losses and may require an increase in the provision for credit losses or the recognition of further loan charge-offs, based on judgments different than those of management. In addition, if charge-offs in future periods exceed the allowance for credit losses, we will need additional provisions to increase the allowance for credit losses. Any increases in the allowance for credit losses will result in a decrease in net income and, possibly, capital and may have a material adverse effect on our financial condition and results of operations. A discussion of the policies and procedures related to management’s process for determining the appropriate level of the allowance for credit losses is set forth under the headings “Critical Accounting Policies” and “Risk Management – Credit Risk and Allowance for Credit Losses on Loans and Unfunded Commitments” in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, in this report.
17
We are subject to interest rate risk.
Our earnings and cash flows are largely dependent upon our net interest income. Net interest income is the difference between interest earned on assets, such as loans and securities, and the cost of interest-bearing liabilities, such as deposits and borrowed funds. Interest rates are highly sensitive to many factors that are beyond our control, including general economic conditions and policies of various governmental and regulatory agencies and, in particular, the Federal Reserve. In response to the COVID-19 pandemic, the Federal Reserve decreased the federal funds target rate by 150 basis points in March 2020. Changes in monetary policy, including changes in interest rates, could influence not only the interest we receive on loans and securities and the amount of interest we pay on deposits and borrowings, but such changes could also affect (1) our ability to originate loans and obtain deposits, which could reduce the amount of fee income generated, and (2) the fair value of our financial assets and liabilities.
Our financial results are constantly exposed to market risk.
Market risk refers to the probability of variations in net interest income or the fair value of our assets and liabilities due to changes in interest rates, among other things. The primary source of market risk to us is the impact of changes in interest rates on net interest income. We are subject to market risk because of the following factors:
| — | Assets and liabilities may mature or reprice at different times. For example, if assets reprice more slowly than liabilities and interest rates are generally rising, earnings may initially decline. | ||||
| — | Assets and liabilities may reprice at the same time but by different amounts. For example, when interest rates are generally rising, we may increase rates charged on loans by an amount that is less than the general increase in market interest rates because of intense pricing competition, while similarly intense pricing competition for deposits dictates that we raise our deposit rates in line with the general increase in market rates. Also, risk occurs when assets and liabilities have similar repricing frequencies but are tied to different market interest rate indices that may not move in tandem. | ||||
| — | Short-term and long-term market interest rates may change by different amounts, i.e., the shape of the yield curve may affect new loan yields and funding costs differently. | ||||
| — | The remaining maturity of various assets and liabilities may shorten or lengthen as interest rates change. For example, if long-term mortgage interest rates decline sharply, mortgage backed securities held in our securities portfolio may prepay significantly earlier than anticipated, which could reduce portfolio income. If prepayment rates increase, we would be required to amortize net premiums into income over a shorter period of time, thereby reducing the corresponding asset yield and net interest income. | ||||
| — | Interest rates may have an indirect impact on loan demand, credit losses, loan origination volume, the value of financial assets and financial liabilities, gains and losses on sales of securities and loans, the value of mortgage servicing rights and other sources of earnings. | ||||
Although management believes it has implemented effective asset and liability management strategies to reduce market risk on the results of our operations, these strategies are based on assumptions that may be incorrect. Any substantial, unexpected, prolonged change in market interest rates could have a material adverse effect on our financial condition and results of operations.
Volatility in interest rates may also result in disintermediation, which is the flow of funds away from financial institutions into direct investments, such as U.S. Government and Agency securities and other investment vehicles, including mutual funds, which generally pay higher rates of return than financial institutions because of the absence of federal insurance premiums and reserve requirements. Disintermediation could also result in material adverse effects on our financial condition and results of operations.
A discussion of our policies and procedures used to identify, assess and manage certain interest rate risk is set forth under the heading “Risk Management – Interest Rate Risk” in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, in this report.
The planned phasing out of the London Interbank Offered Rate (“LIBOR”) as a financial benchmark may adversely affect our business and financial results.
The planned phasing out of LIBOR as a financial benchmark presents risks to the financial instruments originated or held by the Company. LIBOR is the reference rate used for many of our transactions, including a substantial portion of our variable rate loans as well as our borrowing and purchase and sale of securities; in addition, the derivatives that we use to manage risk related to the foregoing transactions are tied to LIBOR. However, a reduced volume of interbank unsecured term borrowing coupled with recent legal and regulatory proceedings related to rate manipulation by certain financial institutions has led to international reconsideration of LIBOR as a financial benchmark. The United Kingdom Financial Conduct Authority (“FCA”), which regulates the process for establishing LIBOR, announced in July 2017 that the sustainability of LIBOR cannot be guaranteed. Accordingly, the FCA intends to stop persuading, or compelling, banks to submit to LIBOR after 2021. Until such
18
time, however, FCA panel banks have agreed to continue to support LIBOR.
It is not clear at this time how LIBOR will be determined for purposes of financial instruments that are currently referencing LIBOR if and when it ceases to exist. If LIBOR is discontinued after 2021 as expected, there may be uncertainty or differences in the calculation of the applicable interest rate or payment amount depending on the terms of the governing instruments. Such discontinuation may cause us to incur significant expense in amending these governing instruments and otherwise effecting the transition to a new reference rate. Discontinuation also may increase operational and other risks to the Company and the industry.
While there is no consensus on what rate or rates may become accepted alternatives to LIBOR, a steering committee comprised of large U.S. financial institutions, the Alternative Reference Rate Committee, or ARRC, selected the Secured Overnight Finance Rate (“SOFR”) as an alternative to LIBOR. SOFR has been published by the Federal Reserve Bank of New York (“FRBNY”) since May 2018, and it is intended to be a broad measure of the cost of borrowing cash overnight collateralized by U.S. Treasury securities. ARRC has proposed a paced market transition plan to SOFR from LIBOR and organizations are currently considering industry wide and company-specific transition plans as it relates to derivatives and cash markets exposed to LIBOR.
Although the floating interest rate component of the Company’s 4.50% fixed-to-floating rate subordinated notes due 2035 are linked to SOFR, the Company has not yet decided if it will adopt SOFR or another rate as the reference rate for its lending or borrowing transactions, and there can be no assurances that, regardless of the Company’s decision, SOFR will be widely adopted as the replacement reference rate for LIBOR. In addition, because SOFR is published by the FRBNY based on data received from other sources, we have no control over its determination, calculation or publication. Finally, there can be no assurance that SOFR will not be discontinued or fundamentally altered in a manner that is materially adverse to the parties that utilize SOFR as the reference rate for transactions.
The market transition away from LIBOR to an alternative reference rate, including SOFR, is complex and could have a range of adverse effects on our business, financial condition, and results of operations. In particular, any such transition could:
| — |
adversely affect the interest rates paid or received on, and the revenue and expenses associated with, our floating rate obligations, loans, deposits, derivatives and other financial instruments tied to LIBOR rates, or other securities or financial arrangements given LIBOR's role in determining market interest rates globally;
|
||||
| — |
adversely affect the value of our floating rate obligations, loans, deposits, derivatives and other financial instruments tied to LIBOR rates, or other securities or financial arrangements;
|
||||
| — |
result in disputes, litigation or other actions with counterparties regarding the interpretation and enforceability of certain fallback language in LIBOR-based notes, securities and other instruments; and
|
||||
| — |
require the transition to or development of appropriate systems and analytics to effectively transition our risk management processes from LIBOR-based products to those based on the applicable alternative pricing benchmark.
|
||||
Finally, the implementation of LIBOR reform proposals may result in increased compliance costs and operational costs, including costs related to continued participation in LIBOR and the transition to a replacement reference rate or rates. We cannot reasonably estimate the expected cost.
Liquidity needs could adversely affect our results of operations and financial condition.
Maintaining adequate liquidity is crucial to the operation of our business. We need sufficient liquidity to meet customer loan requests, deposit maturities and withdrawals and other cash commitments arising in both the ordinary course of business and in other unpredictable circumstances. We rely on dividends from the Bank as our primary source of funds. The primary source of the Bank’s funds are customer deposits, loan repayments, proceeds from our investment securities and borrowings. While scheduled loan repayments are a relatively stable source of funds, they are subject to the ability of borrowers to repay the loans. The ability of borrowers to repay loans can be adversely affected by a number of factors, including changes in economic conditions, adverse trends or events affecting business industry groups, reductions in real estate values or markets, business closings or lay-offs, pandemics, inclement weather, natural disasters and international instability. Additionally, deposit levels may be affected by a number of factors, including rates paid by competitors, general interest rate levels, returns available to customers on alternative investments and general economic conditions. Accordingly, we may be required from time to time to rely on secondary sources of liquidity to meet withdrawal demands or otherwise fund operations or to support growth. Such sources include Federal Home Loan Bank advances and federal funds lines of credit from correspondent banks.
If the aforementioned sources of liquidity are not adequate for our needs, we may attempt to raise additional capital in the equity or debt markets. Our ability to raise additional capital, if needed, will depend on conditions in such markets at that time, which are outside our control, and on our financial performance.
19
If we are unable to meet our liquidity needs through any of the aforementioned sources, whether at all or at the time or the cost that we anticipate, we may be required to slow or discontinue loan growth, capital expenditures or other investments or liquidate assets.
We depend on the accuracy and completeness of information furnished by others about customers and counterparties.
In deciding whether to extend credit or enter into other transactions, we often rely on information furnished by or on behalf of customers and counterparties, including financial statements, credit reports, other financial information and appraisals of the value of collateral. We may also rely on representations of those customers, counterparties or other third parties, such as independent auditors, as to the accuracy and completeness of that information. Reliance on inaccurate or misleading financial statements, credit reports, other financial information or appraisals could have a material adverse effect on our business and, in turn, our financial condition and results of operations.
Competition in our industry is intense and may adversely affect our profitability.
We face substantial competition in all areas of our operations from a variety of different competitors, many of which are larger and have substantially greater resources than we have, including higher total assets and capitalization, greater access to capital markets and a broader offering of financial services. Such competitors primarily include national, regional and community banks within the various markets in which we operate. We also face competition from many other types of financial institutions, including savings and loans, credit unions, finance companies, brokerage firms, insurance companies, factoring companies, FinTech companies and other financial intermediaries. The information under the heading “Competition” in Item 1, Business, in this report provides more information regarding the competitive conditions in our growth markets.
Our industry could become even more competitive as a result of legislative, regulatory and technological changes. We also expect continued consolidation in the banking industry as a result of, among other things, elevated regulatory compliance costs, the benefits of larger scale when making investments in new technology and changes in laws affecting larger financial institutions. Banks, securities firms and insurance companies can merge under the umbrella of a financial holding company, which can offer virtually any type of financial service, including banking, securities underwriting, insurance (both agency and underwriting) and merchant banking. Also, legislative and regulatory changes on both the federal and state level may materially affect competitive conditions in our industry. Finally, technology has lowered barriers to entry and made it possible for non-banks to offer products and services traditionally provided by banks, such as loans and automatic transfer and payment systems. Many of our competitors have fewer regulatory constraints and may have lower cost structures.
Our ability to compete successfully depends on a number of factors, including, among other things:
| — | the ability to develop, maintain and build upon long-term customer relationships based on top quality service, high ethical standards and safe and sound assets; | ||||
| — | the ability to expand our market position; | ||||
| — | the scope, relevance and pricing of products and services offered to meet customer needs and demands; | ||||
| — | the rate at which we introduce new products and services relative to our competitors; | ||||
| — | customer satisfaction with our level of service; and | ||||
| — | industry and general economic trends. | ||||
Failure to perform in any of these areas could significantly weaken our competitive position, which could adversely affect our growth and profitability, which, in turn, could have a material adverse effect on our financial condition and results of operations.
We may be adversely affected by the soundness of other financial institutions and other third parties.
Entities within the financial services industry are interrelated as a result of trading, clearing, counterparty and other relationships. We have exposure to many different industries and counterparties and from time to time execute transactions with counterparties in the financial services industry, including commercial banks, brokers and dealers, investment banks and other institutional clients. Many of these transactions expose us to credit risk in the event of a default by a counterparty or client. In addition, our credit risk may be exacerbated when the collateral we hold cannot be realized upon or is liquidated at prices not sufficient to recover the full amount of the credit due to us. Any such losses could have a material adverse effect on our financial condition and results of operations.
20
We are subject to extensive government regulation, and such regulation could limit or restrict our activities and adversely affect our earnings.
We and the Bank are subject to extensive federal and state regulation and supervision. Banking regulations are primarily intended to protect depositors’ funds, federal deposit insurance funds and the banking system as a whole, while consumer protection statutes are primarily focused on the protection of the users of our lending and deposit services. These regulations affect our lending practices, capital structure, investment practices, dividend policy and growth, among other things. In addition, significant changes to such regulations have been proposed or may be proposed. Changes to statutes, regulations or regulatory policies, including changes in interpretation or implementation of the foregoing, could affect us and/or the Bank in substantial and unpredictable ways. Such changes could subject us to additional costs, limit the types of financial services and products we may offer and/or increase the ability of non-banks to offer competing financial services and products, among other things.
Under regulatory capital adequacy guidelines and other regulatory requirements, we and the Bank must meet guidelines that include quantitative measures of assets, liabilities and certain off-balance sheet items, subject to qualitative judgments by regulators about components, risk weightings and other factors. If we fail to meet these minimum capital guidelines and other regulatory requirements, our financial condition would be materially and adversely affected. Our failure to maintain the status of “well capitalized” under our regulatory framework could affect the confidence of our customers in us, thus compromising our competitive position. In addition, failure to maintain the status of “well capitalized” under our regulatory framework, “well managed” under regulatory examination procedures or “satisfactory” under the CRA could compromise our status as a bank holding company and related eligibility for a streamlined review process for merger or acquisition proposals and would result in higher deposit insurance premiums assessed by the FDIC.
We are also subject to various privacy, data protection and information security laws. Under the GLB Act, we are subject to limitations on our ability to share our customers’ nonpublic personal information with unaffiliated parties, and we are required to provide certain disclosures to our customers about our data collection and security practices. Customers have the right to opt out of our disclosure of their personal financial information to unaffiliated parties. We are also subject to state laws regulating the privacy of individual's private information, many of which are more restrictive, and have more severe sanctions for noncompliance, than the GLB Act. Finally, the GLB Act requires us to develop, implement and maintain a written comprehensive information security program containing appropriate safeguards for our customers’ nonpublic personal information. New laws and regulations have also been proposed that could increase our privacy, data protection and information security compliance costs. Our failure to comply with new or existing privacy, data protection and information security laws and regulations could result in regulatory or governmental investigations and/or fines, sanctions and other expenses which could have a material adverse effect on our financial condition and results of operations.
As a public company, we are also subject to laws, regulations and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act of 2002, the Dodd-Frank Act and SEC regulations. These laws, regulations and standards are subject to varying interpretations, amendment or outright repeal. As a result, the amendment or repeal of any such laws, regulations or standards, or the issuance of new guidance for complying therewith by regulatory and governing bodies, could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices. We are committed to maintaining high standards of corporate governance and public disclosure. As a result, our efforts to comply with evolving laws, regulations and standards have resulted in, and are likely to continue to result in, increased expenses and a diversion of management time and attention.
Failure to comply with laws, regulations or policies could also result in sanctions by regulatory agencies and/or civil money penalties, which could have a material adverse effect on our business, financial condition and results of operations. While we have policies and procedures designed to prevent any such violations, such violations nevertheless may occur. The information under the heading “Supervision and Regulation” in Item 1, Business, and Note 22, “Regulatory Matters,” in the Notes to Consolidated Financial Statements in Item 8, Financial Statements and Supplementary Data, in this report provides more information regarding the regulatory environment in which we and the Bank operate.
Higher FDIC deposit insurance premiums and assessments could adversely affect our financial condition.
In order to replenish the Deposit Insurance Fund following the recession in 2008-2009, the FDIC significantly increased the assessment rates paid by financial institutions for deposit insurance. In November 2018, the DIF reached the minimum reserve ratio of 1.35% required under the Dodd-Frank Act, which resulted in the discontinuance of the assessment surcharges that had been charged to banks with greater than $10 billion in assets like the Bank. However, under the Dodd-Frank Act, if the reserve ratio falls or is projected within 6 months to fall below 1.35%, or if the FDIC increases reserves against future losses, the increased assessments are to be borne primarily by institutions with assets greater than $10 billion, which will apply to the Bank. Any increases in FDIC insurance premiums and any special assessments may adversely affect our financial condition and
21
results of operations.
Changes in accounting standards issued by FASB or other standard-setting bodies may adversely affect our financial statements.
Our financial statements are subject to the application of accounting principles generally accepted in the United States (“GAAP”), which are periodically revised and/or expanded. From time to time, FASB or other accounting standard setting bodies adopt new accounting standards or amend existing standards. In addition, market conditions often prompt these bodies to promulgate new guidance that further interprets or seeks to revise accounting pronouncements related to financial instruments, structures or transactions as well as to issue new standards expanding disclosures. Our estimate of the impact of accounting developments that have been issued but not yet implemented is disclosed in our annual reports on Form 10-K and our quarterly reports on Form 10-Q, but the impact of these changes often is difficult to precisely assess. In some cases, we could be required to apply a new or revised standard retroactively, resulting in changes to previously reported financial results, or a cumulative charge to retained earnings. It is possible that future accounting standards that we are required to adopt could change the current accounting treatment that we apply to our consolidated financial statements and that such changes could have a material effect on our financial condition and results of operations.
We are subject to environmental liability risk associated with lending activities.
A significant portion of our loan portfolio is secured by real property. During the ordinary course of business, we may foreclose on and take title to properties securing certain loans. In doing so, there is a risk that hazardous or toxic substances could be found on these properties. If hazardous or toxic substances are found, we may be liable for remediation costs, as well as for personal injury and property damage. Environmental laws may require us to incur substantial expenses and may materially reduce the affected property’s value or limit our ability to use or sell the affected property. The remediation costs and any other financial liabilities associated with an environmental hazard could have a material adverse effect on our financial condition and results of operations. In addition, future laws or more stringent interpretations or enforcement policies with respect to existing laws may increase our exposure to environmental liability. Although management has policies and procedures to perform an environmental review before the loan is recorded and before initiating any foreclosure action on real property, these reviews may not be sufficient to detect all potential environmental hazards.
Risks Related to Our Business
Our business may be adversely affected by current economic conditions in general and specifically in the markets in which we operate.
General business and economic conditions in the United States and abroad can materially affect our business and operations and the businesses and operations of our customers. A weak U.S. economy is likely to cause uncertainty about the federal fiscal policymaking process, the medium and long-term fiscal outlook of the federal government and future tax rates. In addition, economic and other conditions in foreign countries could affect the stability of global financial markets and adversely impact global supply chains, which could hinder U.S. economic growth. Future developments (including the extent of the virus’s spread and the measures, such as vaccines, quarantines and travel restrictions, taken to contain such spread), may adversely affect economic conditions in the United States generally and our markets in particular.
Weak economic conditions are characterized by deflation, fluctuations in debt and equity capital markets, a lack of liquidity and/or depressed prices in the secondary market for mortgage loans, increased delinquencies on mortgage, consumer and C&I loans, residential and commercial real estate price declines and lower home sales and commercial activity. All of these factors are detrimental to our business, and the interplay between these factors can be complex and unpredictable. Our business is also significantly affected by monetary and related policies of the U.S. federal government and its agencies. Changes in any of these policies are influenced by macroeconomic conditions and other factors that are beyond our control. Adverse economic conditions and government policy responses to such conditions could have a material adverse effect on the businesses and operations of our customers and in turn on our business, financial condition, results of operations and growth prospects.
More particularly, much of our business development and marketing strategy is directed toward fulfilling the banking and financial services needs of small to medium size businesses. Such businesses generally have fewer financial resources in terms of capital or borrowing capacity than larger entities. If general economic conditions negatively impact the markets in which we operate and these businesses are adversely affected, our financial condition and results of operations may be negatively affected.
22
We have a high concentration of loans secured by real estate.
At December 31, 2020, approximately 82.73% of our loan portfolio (excluding loans under the Paycheck Protection Program) had real estate as a primary or secondary component of the collateral securing the loan. The real estate provides an alternate source of repayment in the event of a default by the borrower. Real estate values have generally recovered since the most recent recession, but any adverse change in our markets could significantly impair the value of the particular collateral securing our loans and our ability to sell the collateral upon foreclosure for an amount necessary to satisfy the borrower’s obligations to us. Furthermore, in a declining real estate market, we often will need to further increase our allowance for credit losses to address the deterioration in the value of the real estate securing our loans. Any of the foregoing could have a material adverse effect on our financial condition and results of operations.
We have a concentration of credit exposure in commercial real estate.
In addition to the general risks associated with our lending activities described above, including the effects of declines in real estate values, commercial real estate (“CRE”) loans are subject to additional risks. These loans depend on cash flows from the property to service the debt. Cash flows, either in the form of rental income or the proceeds from sales of commercial real estate, may be affected significantly by general economic conditions. A general downturn in the local economy where the property is located, or a decline in occupancy rates in particular, could increase the likelihood of default. An increase in defaults in our CRE loan portfolio could have a material adverse effect on our financial condition and results of operations. At December 31, 2020, we had approximately $5.4 billion in commercial real estate loans, representing approximately 49.51% of our loans outstanding on that date, as follows:
| (thousands) | December 31, 2020 | ||||
| Commercial Real Estate | |||||
| Owner-occupied | $ | 1,657,806 | |||
| Non-owner occupied | 2,747,467 | ||||
| Construction | 858,104 | ||||
| Land Development: | |||||
| Commercial mortgage | 149,579 | ||||
| Total Commercial real estate loans | $ | 5,412,956 | |||
As discussed under the heading “Supervision and Regulation” in Item 1, Business, above, the federal banking agencies promulgated guidance regarding when an institution will be deemed to potentially have significant CRE concentration risk exposure, as indicated by the results of the 100/300 Test. Although the 100/300 Test is not a limit on our lending activity, if any future results of a 100/300 Test evaluation show us to have a potential CRE concentration risk, we may elect, or be required by our regulators, to adopt additional risk management practices or other limits on our activities, which could have a material adverse effect on our financial condition and results of operations.
A failure or breach of our operational or security systems, including as a result of cyber-attacks, could disrupt our business, result in the disclosure or misuse of confidential or proprietary information, damage our reputation and create significant financial and legal exposure for us.
As a financial institution, we rely heavily on our ability, and the ability of our third party service providers, to securely and reliably process, record, transmit and monitor confidential and other information through our and our third party service provider’s computer systems and networks. Our operational systems, including, among other things, deposit and loan servicing, online and mobile banking, wealth management, accounting and data processing, could be materially adversely impacted by a failure, interruption or breach in the security or integrity of any of these systems, whether our own or one of our third party service provider’s. Threats to these systems come from a variety of sources, including computer hacking involving the introduction of computer viruses or malware, cyber-attacks, identity theft, electronic fraudulent activity and attempted theft of financial assets. These threats are very sophisticated and constantly evolving. In addition, our systems are threatened by unpredictable events such as power outages or tornadoes or other natural disasters.
We have invested a significant amount of time and expense, in security infrastructure investments and the development of policies and procedures governing our operations as well as employee training and monitoring of our third party service providers, in our efforts to preserve the security and integrity of our systems from the aforementioned threats. Despite these efforts, we can provide no assurances that our systems, or our provider’s systems, will not experience any failures, interruptions or security breaches or that, if any such failures, interruptions or breaches occur, they will be addressed in a timely and adequate manner. If the security and integrity of our systems, or the systems of one of our providers, are compromised, our operations could be significantly disrupted and our or our customer’s confidential information could be misappropriated, among other
23
things. This in turn could result in financial losses to us or our customers, lasting damage to our reputation, the violation of privacy or other laws and significant litigation risk, all of which could have a material adverse effect on our financial condition and results of operations.
Our risk management framework may not be effective in mitigating risk and loss to us.
We are subject to numerous risks, including lending risk, interest rate risk, liquidity risk, market risk, information security risk and model risk, among other risks encountered in the ordinary course of our operations. We have put in place processes and procedures designed to identify, measure, monitor and mitigate these risks. However, all risk management frameworks are inherently limited, for a number of reasons. First, we may not have identified all material risks affecting our operations. Next, our current procedures may not anticipate future development of currently unanticipated or unknown risks. Also, we may have underestimated the impact of known risks or overestimated the effectiveness of the policies and procedures we have implemented to mitigate these risks. The recent recession and the heightened regulatory scrutiny of financial institutions that resulted therefrom, coupled with increases in the scope and complexity of our operations, among other things, have increased the level of risk that we must manage. Accordingly, we could suffer losses as a result of our failure to properly anticipate and manage these risks.
Our business strategy includes the continuation of growth plans, and our financial condition and results of operations could be negatively affected if we fail to grow or fail to manage our growth effectively.
Historically, we have grown our business through the acquisition of entire financial institutions and through de novo branching and we intend to continue pursuing this growth strategy for the foreseeable future. Our prospects must be considered in light of the risks, expenses and difficulties frequently encountered by companies when expanding their franchise, including the following:
Management of Growth
. We may be unable to successfully:
| — | maintain loan quality in the context of significant loan growth; | ||||
| — | maintain adequate management personnel and systems to oversee such growth; | ||||
| — | maintain adequate internal audit, loan review and compliance functions; and | ||||
| — | implement additional policies, procedures and operating systems required to support such growth. | ||||
Operating Results
. Existing offices or future offices may not maintain or achieve deposit levels, loan balances or other operating results necessary to avoid losses or produce profits. Our growth strategy necessarily entails growth in overhead expenses as we routinely add new offices and staff. Our historical results may not be indicative of future results or results that may be achieved if we increase the number and concentration of our branch offices. Should any new location be unprofitable or marginally profitable, or should any existing location experience a decline in profitability or incur losses, the adverse effect on our results of operations and financial condition could be more significant than would be the case for a larger company.
Expansion into New Markets
. Much of our recent growth has been focused in the highly-competitive metropolitan areas of Memphis and Nashville, Tennessee, Birmingham and Huntsville, Alabama, Atlanta, Georgia, east Tennessee, as well as Gainesville and Ocala, Florida. In these growth markets we face competition from a wide array of financial institutions, including much larger, well-established financial institutions.
Regulatory and Economic Factors
. Our growth and expansion plans may be adversely affected by a number of regulatory and economic developments or other events. Failure to obtain required regulatory approvals, changes in laws and regulations or other regulatory developments and changes in prevailing economic conditions or other unanticipated events may prevent or adversely affect our continued growth and expansion. Such factors may cause us to alter our growth and expansion plans or slow or halt the growth and expansion process, which may prevent us from entering certain target markets or allow competitors to gain or retain market share in our existing or expected markets.
Failure to successfully address these issues could have a material adverse effect on our financial condition and results of operations, and could adversely affect our ability to successfully implement our business strategy. Also, if our growth occurs more slowly than anticipated or declines, our operating results could be materially adversely affected.
We may fail to realize the anticipated benefits of our acquisitions.
The success of our acquisitions will depend on, among other things, our ability to realize anticipated cost savings and to integrate the acquired assets and operations in a manner that permits growth opportunities and does not materially disrupt our existing customer relationships or result in decreased revenues resulting from any loss of customers. If we are not able to successfully achieve these objectives, the anticipated benefits of the acquisition may not be realized fully or at all or may take
24
longer to realize than expected. Additionally, we will make fair value estimates of certain assets and liabilities in recording each acquisition. Actual values of these assets and liabilities could differ from our estimates, which could result in our not achieving the anticipated benefits of the particular acquisition.
We cannot assure investors that our acquisitions will have positive results, including results relating to: correctly assessing the asset quality of the assets acquired; the total cost of integration, including management attention and resources; the time required to complete the integration successfully; the amount of longer-term cost savings; being able to profitably deploy funds acquired in the transaction; retaining the existing client relationships; or the overall performance of the combined business.
Our future growth and profitability depends, in part, on our ability to successfully manage the combined operations. Integration of an acquired business can be complex and costly, and we may encounter a number of difficulties, such as:
| — | deposit attrition, customer loss and revenue loss; | ||||
| — | the loss of key employees; | ||||
| — | the disruption of our operations and business; | ||||
| — | our inability to maintain and increase competitive presence; | ||||
| — | possible inconsistencies in standards, control procedures and policies; and/or | ||||
| — | unexpected problems with costs, operations, personnel, technology and credit. | ||||
Additionally, general market and economic conditions or governmental actions affecting the financial industry generally may inhibit our successful integration of the operations acquired.
We may continue to experience increased credit costs or need to take additional markdowns and make additional provisions to the allowance for credit losses on loans. Any of these actions could adversely affect our financial condition and results of operations in the future. In addition, the attention and effort devoted to the integration of an acquired business may divert management’s attention from other important issues and could harm our business.
We may face risks with respect to future acquisitions.
When we attempt to expand our business through mergers and acquisitions (including FDIC-assisted transactions), we seek targets that are culturally similar to us, have experienced management and possess either significant market presence or have potential for improved profitability through economies of scale or expanded services or, in the case of FDIC-assisted transactions, on account of the loss share arrangements with the FDIC associated with such transactions. In addition to the general risks associated with our growth plans and the particular risks associated with FDIC-assisted transactions, both of which are highlighted above, in general acquiring other banks, businesses or branches involves various risks commonly associated with acquisitions, including, among other things:
| — | the time and costs associated with identifying and evaluating potential acquisition and merger targets; | ||||
| — | inaccuracies in the estimates and judgments used to evaluate credit, operations, management and market risks with respect to the target institution; | ||||
| — | the time and costs of evaluating new markets, hiring experienced local management and opening new bank locations, and the time lags between these activities and the generation of sufficient assets and deposits to support the costs of the expansion; | ||||
| — | our ability to finance an acquisition and possible dilution to our existing shareholders; | ||||
| — | the diversion of our management’s attention to the negotiation of a transaction; | ||||
| — | the incurrence of an impairment of goodwill associated with an acquisition and adverse effects on our results of operations; | ||||
| — | entry into new markets where we lack experience; and | ||||
| — | risks associated with integrating the operations and personnel of acquired businesses. | ||||
We expect to continue to evaluate merger and acquisition opportunities (including FDIC-assisted transactions) that are presented to us and conduct due diligence activities related to possible transactions with other financial institutions. As a result, merger or acquisition discussions and, in some cases, negotiations may take place and future mergers or acquisitions involving cash, debt or equity securities may occur at any time. Historically, acquisitions of non-failed financial institutions involve the payment of a premium over book and market values, and, therefore, some dilution of our book value and net income per common share may occur in connection with any future transaction. Failure to realize the expected revenue increases, cost savings, increases in geographic or product presence and/or other projected benefits from an acquisition could have a material adverse effect on our financial condition and results of operations.
25
Risks Associated With Our Common Stock
Our ability to declare and pay dividends is limited by law, and we may be unable to pay future dividends.
We are a separate and distinct legal entity from the Bank, and we receive substantially all of our revenue from dividends from the Bank. These dividends are the principal source of funds to pay dividends on our common stock and interest and principal on our debt. Various federal and/or state laws and regulations limit the amount of dividends that the Bank may pay to us. In the event the Bank is unable to pay dividends to us, we may not be able to service our debt, pay our obligations or pay dividends on our common stock. The inability to receive dividends from the Bank could have a material adverse effect on our business, financial condition and results of operations. The information under Note 21, “Restrictions on Cash, Securities, Bank Dividends, Loans or Advances,” in the Notes to Consolidated Financial Statements in Item 8, Financial Statements and Supplementary Data, in this report provides a detailed discussion about the restrictions governing the Bank’s ability to transfer funds to us.
Our stock price can be volatile.
Stock price volatility may make it more difficult for an investor to resell our common stock when desired and at attractive prices. Our stock price can fluctuate significantly in response to a variety of factors including, among other things:
| — | actual or anticipated variations in quarterly results of operations; | ||||
| — | recommendations by securities analysts; | ||||
| — | operating and stock price performance of other companies that investors deem comparable to us; | ||||
| — | news reports relating to trends, concerns and other issues in the banking and financial services industry; | ||||
| — | perceptions in the marketplace regarding us and/or our competitors; | ||||
| — | new technology used, or services offered, by us or our competitors; | ||||
| — | significant acquisitions or business combinations, strategic partnerships, joint ventures or capital commitments by or involving us or our competitors; | ||||
| — | failure to integrate acquisitions or realize anticipated benefits from acquisitions; | ||||
| — | changes in government regulations; and | ||||
| — | civil unrest and geopolitical conditions such as acts or threats of terrorism or military conflicts. | ||||
General market fluctuations, industry factors and general economic and political conditions and events, such as economic slowdowns or recessions, pandemics, interest rate changes or credit loss trends, could also cause our stock price to decrease regardless of operating results.
The trading volume in our common stock is less than that of other bank holding companies.
Although our common stock is listed for trading on The NASDAQ Global Select Market, the average daily trading volume in our common stock is generally less than that of many of our competitors and other bank holding companies that are publicly-traded companies. For the 60 days ended February 19, 2021, the average daily trading volume for Renasant common stock was 333,240 shares per day. A public trading market having the desired characteristics of depth, liquidity and orderliness depends on the presence in the marketplace of willing buyers and sellers of our common stock at any given time. This presence depends on the individual decisions of investors and general economic and market conditions over which we have no control. Significant sales of our common stock, or the expectation of these sales, could cause volatility in the price of our common stock.
Holders of our junior subordinated debentures have rights that are senior to those of our common shareholders.
We have supported a portion of our growth through the issuance of trust preferred securities from special purpose trusts and accompanying junior subordinated debentures. Also, in connection with our acquisitions of other financial institutions, we have assumed junior subordinated debentures. Payments of the principal and interest on the trust preferred securities of these trusts are conditionally guaranteed by us. Further, the junior subordinated debentures we issued to the trusts are senior to our shares of common stock. As a result, we must make payments on the junior subordinated debentures before any dividends can be paid on our common stock and, in the event of our bankruptcy, dissolution or liquidation, the holders of the junior subordinated debentures must be satisfied before any distributions can be made on our common stock (such dividend restrictions do not apply to the subordinated notes issued in August 2016 and September 2020 or assumed in connection with the Metropolitan acquisition). We have the right to defer distributions on our junior subordinated debentures (and the related trust preferred securities) for up to five years, during which time no dividends may be paid on our common stock.
26
An investment in our common stock is not an insured deposit.
Our common stock is not a bank deposit and, therefore, is not insured against loss by the FDIC, any deposit insurance fund or by any other public or private entity. Investment in our common stock is inherently risky for the reasons described in this “Risk Factors” section and elsewhere in this Annual Report on Form 10-K and is subject to the same market forces that affect the price of common stock in any company. As a result, an investor may lose some or all of its investment in our common stock.
Our Articles of Incorporation and Bylaws, as well as certain banking laws, could decrease our chances of being acquired even if our acquisition is in our shareholders’ best interests.
Provisions of our Articles of Incorporation and Bylaws and federal banking laws, including regulatory approval requirements, could make it more difficult for a third party to acquire us, even if doing so would be perceived to be beneficial to our shareholders. The combination of these provisions impedes a non-negotiated merger or other business combination, which, in turn, could adversely affect the market price of our common stock.
Our issuance of preferred stock could adversely affect holders of our common stock and discourage a takeover.
Our shareholders authorized the Board of Directors to issue up to 5,000,000 shares of preferred stock without any further action on the part of our shareholders. Our Board of Directors also has the power, without shareholder approval, to set the terms of any series of preferred stock that may be issued, including voting rights, dividend rights, preferences over our common stock with respect to dividends or in the event of a dissolution, liquidation or winding up and other terms. In the event that we issue preferred stock in the future that has preference over our common stock with respect to payment of dividends or upon our liquidation, dissolution or winding up, or if we issue preferred stock with voting rights that dilute the voting power of our common stock, the rights of the holders of our common stock or the market price of our common stock could be adversely affected. In addition, the ability of our Board of Directors to issue shares of preferred stock without any action on the part of our shareholders may impede a takeover of us and prevent a transaction perceived to be favorable to our shareholders.
Shares eligible for future sale could have a dilutive effect.
Shares of our common stock eligible for future sale, including those that may be issued in any other private or public offering of our common stock for cash or as incentives under equity incentive plans, could have a dilutive effect on the market for our common stock and could adversely affect market prices. As of February 19, 2021, there were 150,000,000 shares of our common stock authorized, of which 56,238,556 shares were outstanding.
27
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
The principal executive offices of the Company are located at 209 Troy Street, Tupelo, Mississippi. Various departments occupy each floor of the five-story building. The Technology Center, also located in Tupelo, houses electronic data processing, document preparation, document imaging, loan servicing and deposit operations.
As of December 31, 2020, Renasant operated 157 full-service branches, 11 limited-service branches, 181 ATMs and 32 Interactive Teller Machines (ITM). Our Community Banks and Wealth Management segments operate out of all of these branches.
The Bank also operates 21 locations used exclusively for mortgage banking and seven locations used exclusively for loan production. The Wealth Management segment operates two locations used exclusively for investment services.
Renasant Insurance, a wholly-owned subsidiary of the Bank, operates out of eight stand-alone offices throughout Mississippi.
We own or lease our facilities and believe all of our properties are in good condition to meet our business needs. None of our properties are subject to any material encumbrances.
ITEM 3. LEGAL PROCEEDINGS
There are no material pending legal proceedings to which the Company, the Bank, or any of its subsidiaries are a party or to which any of their property is subject, and no such legal proceedings were terminated in the fourth quarter of 2020.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
28
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information and Holders
The Company’s common stock trades on The NASDAQ Global Select Market (“NASDAQ”) under the ticker symbol “RNST.” On February 19, 2021, the Company had approximately 4,350 shareholders of record and the closing sales price of the Company’s common stock was $39.44.
Please refer to Item 12, Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters, for a discussion of the securities authorized for issuance under the Company’s equity compensation plans.
Issuer Purchases of Equity Securities
|
Total Number of Shares Purchased
(1)
|
Average Price per Share | Total Number of Shares Purchased as Part of Publicly Announced Share Repurchase Plans |
Maximum Number of Shares or Approximate Dollar Value That May Yet Be Purchased Under Share Repurchase Plans
(2)
|
|||||||||||||||||||||||
| October 1, 2020 to October 31, 2020 | 3,950 | $ | 28.20 | — | $ | 50,000 | ||||||||||||||||||||
| November 1, 2020 to November 30, 2020 | 9,600 | 32.34 | — | 50,000 | ||||||||||||||||||||||
| December 1, 2020 to December 31, 2020 | — | — | — | 50,000 | ||||||||||||||||||||||
| Total | 13,550 | $ | 31.13 | — | ||||||||||||||||||||||
(1)
For the three months ended December 31, 2020, share amounts in this column represent shares of Renasant Corporation stock withheld to satisfy federal and state tax liabilities related to the vesting of time-based restricted stock awards during the period.
The Company announced a $50.0 million stock repurchase program in October 2019, under which the Company was authorized to repurchase outstanding shares of its common stock either in open market purchases or privately-negotiated transactions. The Company suspended stock repurchases under this program in March 2020, and accordingly no shares were subsequently repurchased prior to the program’s expiration in October 2020.
The Company announced a new $50.0 million stock repurchase program on October 20, 2020 which will remain in effect for one year or, if earlier, the repurchase of the entire amount of common stock authorized to be repurchased.
No shares were repurchased during the fourth quarter of 2020 under this plan.
(2)
Dollars in thousands.
Unregistered Sales of Equity Securities
The Company did not sell any unregistered equity securities during 2020.
29
Stock Performance Graph
The following performance graph, obtained from S&P Global Market Intelligence, compares the performance of our common stock to the NASDAQ Composite Index and to the SNL Southeast Bank Index, which is a peer group of regional southeast bank holding companies (including the Company), for the measurement period. The performance graph assumes that the value of the investment in our common stock, the NASDAQ Market Index and the SNL Geographic Index, Southeast was $100 at December 31, 2015, and that all dividends were reinvested.
| Period Ending December 31, | |||||||||||||||||||||||||||||||||||
| 2015 | 2016 | 2017 | 2018 | 2019 | 2020 | ||||||||||||||||||||||||||||||
| Renasant Corporation | $ | 100.00 | $ | 125.16 | $ | 123.39 | $ | 92.89 | $ | 111.69 | $ | 110.01 | |||||||||||||||||||||||
| NASDAQ Composite Index | 100.00 | 108.87 | 141.13 | 137.12 | 187.44 | 271.64 | |||||||||||||||||||||||||||||
|
SNL Southeast Bank Index
(1)
|
100.00 | 132.75 | 164.21 | 135.67 | 191.06 | 172.07 | |||||||||||||||||||||||||||||
(1)
The SNL Southeast Bank Index, is a peer group of 67 regional bank holding companies, whose common stock is traded either on the New York Stock Exchange, NYSE Amex or NASDAQ, and which are headquartered in Alabama, Arkansas, Florida, Georgia, Mississippi, North Carolina, South Carolina, Tennessee, Virginia and West Virginia.
There can be no assurance that our common stock performance will continue in the future with the same or similar trends depicted in the performance graph above. We will not make or endorse any predictions as to future stock performance. The information provided under the heading “Stock Performance Graph” shall not be deemed to be “soliciting material” or to be “filed” with the SEC or subject to its proxy regulations or to the liabilities of Section 18 of the Securities Exchange Act of 1934, as amended, other than as provided in Item 201 of Regulation S-K. The information provided in this section shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended.
30
ITEM 6. SELECTED FINANCIAL DATA
(1)
The following consolidated selected financial data is derived from the Company’s audited financial statements as of and for the five years ended December 31, 2020 and should be read in conjunction with Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, and Item 8, Financial Statements and Supplementary Data, included elsewhere in this report. Certain items in prior financial statements have been reclassified to conform to the current presentation.
(In Thousands, Except Share Data)
| Year Ended December 31, | 2020 | 2019 | 2018 | 2017 | 2016 | ||||||||||||||||||||||||
| Interest income | $ | 498,132 | $ | 542,580 | $ | 461,854 | $ | 374,750 | $ | 329,138 | |||||||||||||||||||
| Interest expense | 71,335 | 98,923 | 65,329 | 37,853 | 28,147 | ||||||||||||||||||||||||
| Net interest income | 426,797 | 443,657 | 396,525 | 336,897 | 300,991 | ||||||||||||||||||||||||
| Provision for credit losses | 86,850 | 7,050 | 6,810 | 7,550 | 7,530 | ||||||||||||||||||||||||
| Noninterest income | 235,532 | 153,254 | 143,961 | 132,140 | 137,415 | ||||||||||||||||||||||||
| Noninterest expense | 471,988 | 374,174 | 345,029 | 301,618 | 295,099 | ||||||||||||||||||||||||
| Income before income taxes | 103,491 | 215,687 | 188,647 | 159,869 | 135,777 | ||||||||||||||||||||||||
| Income taxes | 19,840 | 48,091 | 41,727 | 67,681 | 44,847 | ||||||||||||||||||||||||
| Net income | $ | 83,651 | $ | 167,596 | $ | 146,920 | $ | 92,188 | $ | 90,930 | |||||||||||||||||||
| Per Common Share | |||||||||||||||||||||||||||||
| Net income – Basic | $ | 1.49 | $ | 2.89 | $ | 2.80 | $ | 1.97 | $ | 2.18 | |||||||||||||||||||
| Net income – Diluted | 1.48 | 2.88 | 2.79 | 1.96 | 2.17 | ||||||||||||||||||||||||
| Book value at December 31 | 37.95 | 37.39 | 34.91 | 30.72 | 27.81 | ||||||||||||||||||||||||
|
Closing price
(2)
|
33.68 | 35.42 | 30.18 | 40.89 | 42.22 | ||||||||||||||||||||||||
| Cash dividends declared and paid | 0.88 | 0.87 | 0.80 | 0.73 | 0.71 | ||||||||||||||||||||||||
| Dividend payout | 59.46 | % | 30.21 | % | 28.67 | % | 37.24 | % | 32.72 | % | |||||||||||||||||||
| At December 31, | |||||||||||||||||||||||||||||
| Assets | $ | 14,929,612 | $ | 13,400,618 | $ | 12,934,878 | $ | 9,829,981 | $ | 8,699,851 | |||||||||||||||||||
| Loans, net of unearned income | 10,933,647 | 9,689,638 | 9,083,129 | 7,620,322 | 6,202,709 | ||||||||||||||||||||||||
| Securities | 1,343,457 | 1,290,613 | 1,250,777 | 671,488 | 1,030,530 | ||||||||||||||||||||||||
| Deposits | 12,059,081 | 10,213,168 | 10,128,557 | 7,921,075 | 7,059,137 | ||||||||||||||||||||||||
| Borrowings | 496,310 | 865,598 | 651,324 | 297,360 | 312,135 | ||||||||||||||||||||||||
| Shareholders’ equity | 2,132,733 | 2,125,689 | 2,043,913 | 1,514,983 | 1,232,883 | ||||||||||||||||||||||||
| Selected Ratios | |||||||||||||||||||||||||||||
| Return on average: | |||||||||||||||||||||||||||||
| Total assets | 0.58 | % | 1.30 | % | 1.32 | % | 0.97 | % | 1.08 | % | |||||||||||||||||||
| Shareholders’ equity | 3.96 | % | 7.95 | % | 8.64 | % | 6.68 | % | 8.15 | % | |||||||||||||||||||
| Average shareholders’ equity to average assets | 14.58 | % | 16.37 | % | 15.32 | % | 14.52 | % | 13.26 | % | |||||||||||||||||||
| At December 31, | |||||||||||||||||||||||||||||
| Shareholders’ equity to assets | 14.29 | % | 15.86 | % | 15.80 | % | 15.41 | % | 14.17 | % | |||||||||||||||||||
| Allowance for credit losses on loans to total loans, net of unearned income | 1.61 | % | 0.54 | % | 0.54 | % | 0.61 | % | 0.69 | % | |||||||||||||||||||
| Allowance for credit losses on loans to nonperforming loans | 317.55 | % | 143.61 | % | 188.77 | % | 197.31 | % | 120.34 | % | |||||||||||||||||||
| Nonperforming loans to total loans, net of unearned income | 0.51 | % | 0.37 | % | 0.29 | % | 0.31 | % | 0.57 | % | |||||||||||||||||||
(1)
Selected consolidated financial data includes the effect of mergers and other acquisition transactions from the date of each merger or other transaction. On September 1, 2018, Renasant Corporation acquired Brand Group Holdings, Inc., a Georgia corporation (“Brand”), headquartered in Lawrenceville, Georgia.
On July 1, 2017, Renasant Corporation acquired Metropolitan BancGroup, Inc., a Delaware corporation (“Metropolitan”), headquartered in Ridgeland, Mississippi. On April 1, 2016, Renasant Bank, Renasant Corporation’s wholly-owned subsidiary, acquired KeyWorth Bank, a Georgia banking corporation (“KeyWorth”), headquartered in Johns Creek, Georgia.
For additional information about the Brand acquisition, please refer to Item
31
1, Business, and Note 2, “Mergers and Acquisitions,” in the Notes to Consolidated Financial Statements in Item 8, Financial Statements and Supplementary Data, in Renasant’s Annual Report on Form 10-K for the year ended December 31, 2019, filed with the SEC on February 27, 2020. For additional information about the Metropolitan acquisition, please refer to Item 1, Business, and Note 2, “Mergers and
Acquisitions,” in the Notes to Consolidated Financial Statements in Item 8, Financial Statements and Supplementary Data, in Renasant’s Annual Report on Form 10-K for the year ended December 31, 2018, filed with the SEC on February 27, 2019. For additional information about the KeyWorth acquisition, please refer to Item 1, Business, and Note 2, “Mergers and Acquisitions,” in the Notes to Consolidated Financial Statements in Item 8, Financial Statements and Supplementary Data, in Renasant’s Annual Report on Form 10-K/A for the year ended December 31, 2017, filed with the SEC on February 28, 2018.
(2)
Reflects the closing price on The NASDAQ Global Select Market on the last trading day of the Company’s fiscal year.
32
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(In Thousands, Except Share Data)
The following discussion and analysis of our financial condition as of December 31, 2020 and 2019 and results of operations for each of the years then ended should be read together with the cautionary language regarding forward-looking statements at the beginning of Part I of this Annual Report on Form 10-K and our consolidated financial statements and related notes included under Part II, Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K, as well as Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, of our Annual Report on Form 10-K for the year ended December 31, 2019, which provides a discussion of 2018 items and year-to-year comparisons between 2019 and 2018 that are not included in this Annual Report on Form 10-K.
Performance Overview
Net income was $83,651 for 2020 compared to $167,596 for 2019. Basic and diluted earnings per share (“EPS”) were $1.49 and $1.48, respectively, for 2020 compared to $2.89 and $2.88, respectively, for 2019. At December 31, 2020, total assets increased to $14,929,612 from $13,400,618 at December 31, 2019. The changes in our financial condition and results of operations from 2019 to 2020 were driven by a number of factors, the most prominent of which are highlighted below:
|
Impact of and responses to COVID-19
|
|||||
|
—
|
In response to the COVID-19 pandemic, the Company made its branches accessible only by appointment (with appointments generally being limited to services that required access inside a branch). The Company reopened its branch lobbies to the public in October 2020, subject to capacity limitations, mask-wearing and social distancing requirements designed to promote the safety of our clients and employees. The Company implemented additional measures to minimize Company employees’ exposure to COVID-19, such as working remotely, reconfiguring work spaces to promote social distancing and adjusting staff levels, all of which remain in place. The Company incurred expenses of $10,343 in 2020 in connection with its response to the COVID-19 pandemic, primarily related to employee overtime and other employee benefit costs as well as expenses associated with supplying branches with protective equipment, sanitation supplies (such as floor markings and cautionary signage for branches, face coverings and hand sanitizer) and more frequent and rigorous branch cleaning. We expect that these elevated expenses will continue into 2021 while challenges to growth persist as the United States economy slowly recovers from the pandemic.
|
||||
|
—
|
The Company has been active in the Paycheck Protection Program (“PPP”) and as of December 31, 2020, the balance of such loans included in the Company’s Consolidated Balance Sheets was approximately $1,128,703. | ||||
|
—
|
In response to the economic environment caused by the COVID-19 pandemic, the Company implemented a loan deferral program in the first quarter of 2020 to provide temporary payment relief to both consumer and commercial customers. Any customer current on loan payments, taxes and insurance is eligible for a 90-day deferral of principal and interest payments. Principal and interest payments can be deferred for up to 180 days on residential mortgage loans. A second deferral is available to customers that remain current on taxes and insurance through the first deferral period and also satisfy underwriting standards established by the Company. These standards analyze the ability of the customer to service its loan in accordance with its existing terms in light of the impact of the COVID-19 pandemic on the customer, its industry and the markets in which it operates. The Company’s loan deferral program complies with the guidance set forth in the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) and related guidance from the FDIC and other banking regulators. At December 31, 2020, the Company had 906 loans (not in thousands) on deferral with an aggregate balance of approximately $145,000, or 1.5% of our loan portfolio (excluding PPP loans) by dollar value. In accordance with the applicable guidance, none of these loans are considered “restructured loans.”
|
||||
|
Financial Highlights
|
|||||
|
—
|
Net interest income decreased 3.80% to $426,797 for 2020 as compared to $443,657 for 2019. The decrease from 2019 to 2020 was due to the decline in loan yields as a result of the Federal Reserve’s decision to cut interest rates in response to the COVID-19 pandemic, as well as changes in the mix of earning assets during the quarter due to increased liquidity on the balance sheet, partially offset by a decline in our cost of funds. The Company has continued to focus on lowering the cost of funding through both growing noninterest-bearing deposits and aggressively lowering interest rates on interest-bearing deposits.
|
||||
|
—
|
Net charge-offs as a percentage of average loans were 0.04% in 2020 and 2019. The provision for credit losses was $86,850 (inclusive of $1,500 in provision for credit losses on deferred interest) for 2020 compared to $7,050 for 2019. The large increase in provision expense year over year is attributable to the adoption of the current expected credit loss model (“CECL”) on January 1, 2020 and our response to the economic uncertainty associated with the COVID-19 pandemic.
|
||||
33
|
—
|
Noninterest income was $235,532 for 2020 compared to $153,254 for 2019. The growth in noninterest income is primarily attributable to the strong mortgage production due to the current interest rate environment.
|
||||
|
—
|
Noninterest expense was $471,988 and $374,174 for 2020 and 2019, respectively. The increase in noninterest expense is primarily attributable to increases in salaries and employee benefits, which grew due to the strategic production hires the Company made throughout its footprint during 2019 as well as increased mortgage commissions and incentives related to the increased mortgage production during 2020. Salaries and employee benefits for 2020 also includes approximately $8,237 in expense related to employee overtime and employee benefit accruals directly related to the Company's response to both the COVID-19 pandemic itself and federal legislation enacted to address the pandemic, such as the CARES Act.
|
||||
|
—
|
Loans, net of unearned income, were $10,933,647 at December 31, 2020 compared to $9,689,638 at December 31, 2019, which represents an increase of 12.84% from the previous year. Excluding PPP loans of $1,128,703 at December 31, 2020, total loans increased by $115,306, or 1.19%, from December 31, 2019, while nonpurchased loans increased by $702,863, or 9.26%, over the same time period.
|
||||
|
—
|
Deposits totaled $12,059,081 at December 31, 2020 compared to $10,213,168 at December 31, 2019. Noninterest bearing deposits averaged $3,391,619, or 29.79% of average deposits, for 2020 compared to $2,463,436, or 24.19% of average deposits, for 2019. The growth in noninterest-bearing deposits across the Company’s footprint during 2020 was driven by the Company’s PPP lending, other government stimulus and client sentiment to maintain liquidity.
|
||||
A historical look at key performance indicators is presented below.
| 2020 | 2019 | 2018 | |||||||||||||||
| Diluted EPS | $ | 1.48 | $ | 2.88 | $ | 2.79 | |||||||||||
| Diluted EPS Growth | (48.61) | % | 3.23 | % | 42.35 | % | |||||||||||
| Shareholders’ equity to assets | 14.29 | % | 15.86 | % | 15.80 | % | |||||||||||
|
Tangible shareholders’ equity to tangible assets
(1)
|
8.33 | % | 9.25 | % | 8.92 | % | |||||||||||
| Return on Average Assets | 0.58 | % | 1.30 | % | 1.32 | % | |||||||||||
|
Return on Average Tangible Assets
(1)
|
0.66 | % | 1.46 | % | 1.47 | % | |||||||||||
| Return on Average Shareholders’ Equity | 3.96 | % | 7.95 | % | 8.64 | % | |||||||||||
|
Return on Average Tangible Shareholders’ Equity
(1)
|
7.83 | % | 15.36 | % | 15.98 | % | |||||||||||
(1)
These performance indicators are non-GAAP financial measures. A reconciliation of these financial measures from GAAP to non-GAAP as well as an explanation of why the Company provides these non-GAAP financial measures can be found under the “Non-GAAP Financial Measures” heading at the end of this Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Critical Accounting Policies
Our financial statements are prepared using accounting estimates for various accounts. Wherever feasible, we utilize third-party information to provide management with estimates. Although independent third parties are engaged to assist us in the estimation process, management evaluates the results, challenges assumptions and considers other factors that could impact these estimates. We monitor the status of proposed and newly issued accounting standards to evaluate the impact (or potential impact) on our financial condition and results of operations or on the preparation of our financial statements. Our accounting policies, including the impact of newly issued accounting standards, are discussed in further detail in Note 1, “Significant Accounting Policies,” in the Notes to Consolidated Financial Statements in Item 8, Financial Statements and Supplementary Data, in this report. The following discussion details the accounting policies governing the significant estimates used in preparing our financial statements.
Allowance for Credit Losses
The accounting policy most important to the presentation of our financial statements relates to the allowance for credit losses and the related provision for credit losses. The allowance for credit losses is an estimate of expected losses inherent within the Company’s loans held for investment portfolio and is maintained at a level believed adequate by management to absorb such expected credit losses, as prescribed by the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification Topic (“ASC”) 326, “
Financial Instruments - Credit Losses
” (“ASC 326”). Management evaluates the adequacy of the allowance for credit losses on a quarterly basis.
The credit loss estimation process involves procedures to appropriately consider the unique characteristics of the Company’s loan portfolio segments. Credit quality is assessed and monitored by evaluating various attributes, and the results of those evaluations are utilized in underwriting new loans and in the Company’s process for the estimation of expected credit losses.
34
Credit quality monitoring procedures and indicators can include an assessment of problem loans, the types of loans, historical loss experience, new lending products, emerging credit trends, changes in the size and character of loan categories and other factors, including the Company’s risk rating system, regulatory guidance and economic conditions, such as the unemployment rate and GDP growth in the markets in which the Company operates, as well as trends in the market values of underlying collateral securing loans, all as determined based on input from management, loan review staff and other sources. This evaluation is complex and inherently subjective, as it requires estimates by management that are inherently uncertain and therefore susceptible to significant revision as more information becomes available. In future periods, evaluations of the overall loan portfolio, in light of the factors and forecasts then prevailing, may result in significant changes in the allowance and provision for credit losses in those future periods.
The methodology for estimating the amount of expected credit losses reported in the allowance for credit losses has two basic components: first, a collective or pooled component for estimating expected credit losses for pools of loans that share similar risk characteristics; and second, an asset-specific component involving individual loans that do not share risk characteristics with other loans and the measurement of expected credit losses for such individual loans.
•
In determining the allowance for credit losses on loans evaluated on a collective basis, the Company categorizes loan pools based on loan type and/or risk rating. The Company uses two CECL models: (1) a loss rate model, based on average historical life-of-loan loss rates, which is used for the Real Estate - 1-4 Family Mortgage, Real Estate - Construction and the Installment Loans to Individuals portfolio segments, and (2) for the C&I, Real Estate - Commercial Mortgage and Lease Financing portfolio segments, the Company uses a probability of default/loss given default model, which calculates an expected loss percentage for each loan pool by considering (a) the probability of default, based on the migration of loans from performing (using risk ratings) to default using life-of-loan analysis periods, and (b) the historical severity of loss, based on the aggregate net lifetime losses incurred per loan pool.
The historical loss rates calculated as described above are adjusted, as necessary, for both internal and external qualitative factors where there are differences in the historical loss data of the Company and current or projected future conditions. Internal factors include loss history, changes in credit quality (including movement between risk ratings) and/or credit concentration, the nature and volume of the respective loan portfolio segments, and changes in lending or loan review staffing. External factors include current and reasonable and supportable forecasted economic conditions, the competitive environment and changes in collateral values. These factors are used to adjust the historical loss rates (as described above) to ensure that they reflect management’s expectation of future conditions based on a reasonable and supportable forecast period. To the extent the lives of the loans in the portfolio extend beyond the period for which a reasonable and supportable forecast can be made, when necessary, the models immediately revert back to the historical loss rates adjusted for qualitative factors related to current conditions.
•
For loans that do not share similar risk characteristics with other loans, an individual analysis is performed to determine the expected credit loss. If the respective loan is collateral dependent (that is, when the borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the operation or sale of the collateral), the expected credit loss is measured as the difference between the amortized cost basis of the loan and the fair value of the collateral. The fair value of collateral is initially based on external appraisals. Generally, collateral values for loans for which measurement of expected losses is dependent on the fair value of such collateral are updated every twelve months, either from external third parties or in-house certified appraisers. Third-party appraisals are obtained from a pre-approved list of independent, third-party, local appraisal firms. The fair value of the collateral derived from external appraisal is then adjusted for the estimated cost to sell if repayment or satisfaction of a loan is dependent on the sale (rather than only on the operation) of the collateral. Other acceptable methods for determining the expected credit losses for individually evaluated loans (typically used when the loan is not collateral dependent) is a discounted cash flow approach or, if applicable, an observable market price. Once the expected credit loss amount is determined, an allowance equal to such expected credit loss is included in the allowance for credit losses.
Prior to the adoption of ASC 326 on January 1, 2020, the appropriate level of the allowance was based on an ongoing analysis of the loan portfolio and represented an amount that management deemed adequate to provide for inherent losses, including collective impairment as recognized under ASC 450, “Contingencies” (“ASC 450”), in our loan portfolio. Collective impairment was calculated based on loans grouped by grade. Another component of the allowance was losses on loans assessed as impaired under ASC 310, “Receivables” (“ASC 310”). The balance of the loans determined to be impaired under ASC 310 and the related allowance was included in management’s estimation and analysis of the allowance for loan losses. The determination of the appropriate level of the allowance was sensitive to a variety of internal factors, primarily historical loss ratios and assigned risk ratings, and external factors, primarily the economic environment. While no one factor was dominant, each could cause actual loan losses to differ materially from originally estimated amounts.
35
For more information about our loan policies and procedures for addressing credit risk, please refer to the disclosures in this Item under the heading “Risk Management – Credit Risk and Allowance for Credit Losses.”
Business Combinations, Accounting for Purchased Loans
The Company accounts for its acquisitions under ASC 805, “Business Combinations,” which requires the use of the acquisition method of accounting. All identifiable assets acquired, including loans, liabilities assumed and non-controlling interest in the acquired company are recorded at fair value and recognized separately from goodwill. For a purchased asset that the Company has the intent of holding for investment, ASC 326 requires the Company to determine whether the asset has experienced more-than-insignificant deterioration in credit quality since origination. Assets that have experienced more-than insignificant deterioration are referred to as purchased credit deteriorated (“PCD”) assets. ASC 326 provides for special initial recognition of PCD assets, commonly referred to as the “gross-up” approach, whereas the allowance for credit losses is recognized by adding it to the fair value to arrive at the Day 1 amortized cost basis. After initial recognition, the accounting for PCD assets will generally follow the credit loss model that applies to that type of asset. Non-PCD assets record the Day 1 allowance for credit losses through earnings on the date of purchase. The Company will accrete or amortize as interest income the fair value discounts on both PCD and non-PCD assets over the life of the asset.
Prior to the adoption of ASC 326 on January 1, 2020, in regards to a purchased loan, no allowance for loan losses was recorded on the acquisition date because the fair value measurements incorporated assumptions regarding credit risk. This applied even to a purchased loan with evidence of credit deterioration since origination pursuant to ASC 310-30, “Loans and Debt Securities Acquired with Deteriorated Credit Quality” (“ASC 310-30”). Generally speaking, rather than carry over an allowance for loan losses, as part of the acquisition we established a “Day 1 Fair Value” of a purchased loan or pools of purchased loans sharing common risk characteristics, which was equal to the outstanding balance of a purchased loan or pool on the acquisition date less any credit and/or yield discount applied against the purchased loan or pool of loans. In other words, these loans or pools of loans were carried at values which represented our estimate of their future cash flows. After the acquisition date, a purchased loan or pool of loans either met or exceeded the performance expectations established in determining the Day 1 Fair Values or deteriorate from such expected performance which resulted in accelerated accretion or impairment recognized through the provision for loan losses.
Additional details about our loans acquired in connection with our acquisitions is set forth below under the heading “Risk Management - Credit Risk and Allowance for Credit Losses” and in Note 4, “Purchased Loans” in the Notes to Consolidated Financial Statements in Item 8, Financial Statements and Supplementary Data, in this report.
Financial Condition
The following discussion provides details regarding the changes in significant balance sheet accounts at December 31, 2020 compared to December 31, 2019. Total assets were $14,929,612 at December 31, 2020 compared to $13,400,618 at December 31, 2019.
Securities
The securities portfolio is used to provide a source for meeting liquidity needs and to supply securities to be used in collateralizing certain deposits and other types of borrowings. The following table shows the carrying value of our securities portfolio by investment type and the percentage of such investment type relative to the entire securities portfolio, at December 31:
| 2020 | 2019 | ||||||||||||||||||||||
| Balance |
% of
Portfolio |
Balance |
% of
Portfolio |
||||||||||||||||||||
| U.S. Treasury securities | $ | 7,079 | 0.53 | % | $ | 499 | 0.04 | % | |||||||||||||||
| Obligations of other U.S. Government agencies and corporations | 1,009 | 0.08 | 2,531 | 0.20 | |||||||||||||||||||
| Obligations of states and political subdivisions | 305,201 | 22.72 | 223,131 | 17.29 | |||||||||||||||||||
| Mortgage backed securities | 955,549 | 71.13 | 998,101 | 77.33 | |||||||||||||||||||
| Trust preferred securities | 9,012 | 0.67 | 9,986 | 0.77 | |||||||||||||||||||
| Other debt securities | 65,607 | 4.88 | 56,365 | 4.37 | |||||||||||||||||||
| $ | 1,343,457 | 100.01 | % | $ | 1,290,613 | 100.00 | % | ||||||||||||||||
36
During 2020, we purchased $515,657 in investment securities, with mortgage backed securities and collateralized mortgage obligations (“CMOs”), in the aggregate, comprising approximately 73% of such purchases. CMOs are included in the “Mortgage backed securities” line item in the above table. The mortgage backed securities and CMOs held in our investment portfolio are issued by government sponsored entities. Obligations of state and political subdivisions comprised approximately 23% of purchases made during 2020. Other debt securities in our investment portfolio consist of corporate debt securities and issuances from the Small Business Administration (“SBA”). The carrying value of securities sold during 2020 totaled $44,860, resulting in a net gain of $46, while proceeds from maturities and calls of securities during 2020 totaled $437,981, which were primarily reinvested in the securities portfolio.
During 2019, we purchased $492,018 in investment securities, with mortgage backed securities and CMOs, in the aggregate, comprising approximately 79% of such purchases. Obligations of state and political subdivisions comprised approximately 17% of the purchases made in 2019. The carrying value of securities sold during 2019 totaled $212,137 resulting in a net gain of $348. Proceeds from maturities and calls of securities during 2019 totaled $262,287, which were primarily reinvested in the securities portfolio.
At December 31, 2020, unrealized losses of $3,215 were recorded on available for sale investment securities with a carrying value of $85,396. At December 31, 2019, unrealized losses of $4,878 were recorded on available for sale securities with a carrying value of $364,723. The Company does not intend to sell any of the securities in an unrealized loss position, and it is not more likely than not that the Company will be required to sell any such security prior to the recovery of its amortized cost basis, which may be maturity. Furthermore, even though a number of these securities have been in a continuous unrealized loss position for a period greater than twelve months, the Company is collecting principal and interest payments from the respective securities as scheduled. As such, the Company did not record any impairment for the years ended December 31, 2020 and 2019 (determined in accordance with the accounting standards in effect prior to the Company’s adoption of CECL).
The following table sets forth the scheduled maturity distribution and weighted average yield based on the amortized cost of the debt securities in our investment portfolio as of December 31, 2020.
| Amount | Yield | ||||||||||
| Available for Sale: | |||||||||||
| U.S. Treasury securities | |||||||||||
| Maturing within one year or less | $ | 4,012 | 0.75 | % | |||||||
| Maturing after one year through five years | 3,035 | 0.92 | % | ||||||||
| Obligations of other U.S. Government agencies and corporations | |||||||||||
| Maturing within one year or less | 1,003 | 1.48 | % | ||||||||
| Obligations of states and political subdivisions | |||||||||||
| Maturing within one year or less | 4,423 | 3.65 | % | ||||||||
| Maturing after one year through five years | 40,851 | 3.43 | % | ||||||||
| Maturing after five years through ten years | 42,046 | 3.67 | % | ||||||||
| Maturing after ten years | 203,911 | 2.38 | % | ||||||||
| Trust preferred securities | |||||||||||
| Maturing after ten years | 12,013 | 0.82 | % | ||||||||
| Other debt securities - corporate debt | |||||||||||
| Maturing after one year through five years | 2,057 | 3.29 | % | ||||||||
| Maturing after five years through ten years | 32,291 | 4.21 | % | ||||||||
| Residential mortgage backed securities not due at a single maturity date: | |||||||||||
| Government agency MBS | 581,105 | 2.26 | % | ||||||||
| Government agency CMO | 218,373 | 1.68 | % | ||||||||
| Commercial mortgage backed securities not due at a single maturity date: | |||||||||||
| Government agency MBS | 29,053 | 3.75 | % | ||||||||
| Government agency CMO | 99,377 | 3.85 | % | ||||||||
| Other debt securities not due at a single maturity date | 28,423 | 3.59 | % | ||||||||
| $ | 1,301,973 | 2.57 | % | ||||||||
In the table above, weighted average yields on tax-exempt obligations have been computed on a fully tax equivalent basis assuming a federal tax rate of 21% and a state tax rate of 4.45%, which is net of federal tax benefit.
For more information about the Company’s trust preferred securities, see Note 2, “Securities,” in the Notes to Consolidated Financial Statements in Item 8, Financial Statements and Supplementary Data, in this report.
37
Loans Held for Sale
Loans held for sale were $417,771 at December 31, 2020 compared to $318,272 at December 31, 2019. Mortgage loans to be sold are sold either on a “best efforts” basis or under a “mandatory delivery” sales agreement. Under a “best efforts” sales agreement, residential real estate originations are locked in at a contractual rate with third party private investors or directly with government sponsored entities, and the Company is obligated to sell the mortgages to such investors only if the mortgages are closed and funded. The risk we assume is conditioned upon loan underwriting and market conditions in the national mortgage market. Under a “mandatory delivery” sales agreement, the Company commits to deliver a certain principal amount of mortgage loans to an investor at a specified price and delivery date. Penalties are paid to the investor if we fail to satisfy the contract. Gains and losses are realized at the time consideration is received and all other criteria for sales treatment have been met. These loans are typically sold within 30-40 days after the loan is funded. Although loan fees and some interest income are derived from mortgage loans held for sale, the main source of income is gains from the sale of these loans in the secondary market.
Loans
Loans, excluding loans held for sale, are the Company’s most significant earning asset, comprising 73.23% and 72.31% of total assets at December 31, 2020 and 2019, respectively. The tables below set forth the balance of loans outstanding by loan type and the percentage of loans, by category, to total loans at December 31:
| December 31, 2020 | |||||||||||||||||||||||
| Non Purchased | Purchased |
Total
Loans |
Percentage of Total Loans | ||||||||||||||||||||
| Commercial, financial, agricultural (1) | $ | 2,360,471 | $ | 176,513 | $ | 2,536,984 | 23.20 | % | |||||||||||||||
| Lease financing | 75,862 | — | 75,862 | 0.69 | % | ||||||||||||||||||
| Real estate – construction: | |||||||||||||||||||||||
| Residential | 243,814 | 2,859 | 246,673 | 2.26 | % | ||||||||||||||||||
| Commercial | 583,338 | 28,093 | 611,431 | 5.59 | % | ||||||||||||||||||
| Total real estate – construction | 827,152 | 30,952 | 858,104 | 7.85 | % | ||||||||||||||||||
| Real estate – 1-4 family mortgage: | |||||||||||||||||||||||
| Primary | 1,536,181 | 214,770 | 1,750,951 | 16.01 | % | ||||||||||||||||||
| Home equity | 432,768 | 80,392 | 513,160 | 4.69 | % | ||||||||||||||||||
| Rental/investment | 264,436 | 31,928 | 296,364 | 2.71 | % | ||||||||||||||||||
| Land development | 123,179 | 14,654 | 137,833 | 1.26 | % | ||||||||||||||||||
| Total real estate – 1-4 family mortgage | 2,356,564 | 341,744 | 2,698,308 | 24.68 | % | ||||||||||||||||||
| Real estate – commercial mortgage: | |||||||||||||||||||||||
| Owner-occupied | 1,334,765 | 323,041 | 1,657,806 | 15.16 | % | ||||||||||||||||||
| Non-owner occupied | 2,194,739 | 552,728 | 2,747,467 | 25.13 | % | ||||||||||||||||||
| Land development | 120,125 | 29,454 | 149,579 | 1.37 | % | ||||||||||||||||||
| Total real estate – commercial mortgage | 3,649,629 | 905,223 | 4,554,852 | 41.66 | % | ||||||||||||||||||
| Installment loans to individuals | 149,862 | 59,675 | 209,537 | 1.92 | % | ||||||||||||||||||
| Total loans, net of unearned income | $ | 9,419,540 | $ | 1,514,107 | $ | 10,933,647 | 100.00 | % | |||||||||||||||
(1)
Includes PPP loans of $1,128,703 as of December 31, 2020.
38
| December 31, 2019 | |||||||||||||||||||||||
| Non Purchased | Purchased |
Total
Loans |
Percentage of Total Loans | ||||||||||||||||||||
| Commercial, financial, agricultural | $ | 1,052,353 | $ | 315,619 | $ | 1,367,972 | 14.12 | % | |||||||||||||||
| Lease financing | 81,875 | — | 81,875 | 0.84 | % | ||||||||||||||||||
| Real estate – construction: | |||||||||||||||||||||||
| Residential | 272,643 | 16,407 | 289,050 | 2.98 | % | ||||||||||||||||||
| Commercial | 502,258 | 35,175 | 537,433 | 5.55 | % | ||||||||||||||||||
| Total real estate – construction | 774,901 | 51,582 | 826,483 | 8.53 | % | ||||||||||||||||||
| Real estate – 1-4 family mortgage: | |||||||||||||||||||||||
| Primary | 1,449,219 | 332,729 | 1,781,948 | 18.39 | % | ||||||||||||||||||
| Home equity | 456,265 | 117,275 | 573,540 | 5.92 | % | ||||||||||||||||||
| Rental/investment | 291,931 | 43,169 | 335,100 | 3.46 | % | ||||||||||||||||||
| Land development | 152,711 | 23,314 | 176,025 | 1.82 | % | ||||||||||||||||||
| Total real estate – 1-4 family mortgage | 2,350,126 | 516,487 | 2,866,613 | 29.59 | % | ||||||||||||||||||
| Real estate – commercial mortgage: | |||||||||||||||||||||||
| Owner-occupied | 1,209,204 | 428,077 | 1,637,281 | 16.90 | % | ||||||||||||||||||
| Non-owner occupied | 1,803,587 | 647,308 | 2,450,895 | 25.29 | % | ||||||||||||||||||
| Land development | 116,085 | 40,004 | 156,089 | 1.61 | % | ||||||||||||||||||
| Total real estate – commercial mortgage | 3,128,876 | 1,115,389 | 4,244,265 | 43.80 | % | ||||||||||||||||||
| Installment loans to individuals | 199,843 | 102,587 | 302,430 | 3.12 | % | ||||||||||||||||||
| Total loans, net of unearned income | $ | 7,587,974 | $ | 2,101,664 | $ | 9,689,638 | 100.00 | % | |||||||||||||||
Loan concentrations are considered to exist when there are amounts loaned to a number of borrowers engaged in similar activities that would cause them to be similarly impacted by economic or other conditions. At December 31, 2020, there were no concentrations of loans exceeding 10% of total loans other than loans disclosed in the table above.
39
The following table sets forth loans held for investment, net of unearned income, outstanding at December 31, 2020, which, based on remaining contractually-scheduled repayments of principal, are due in the periods indicated. Loans with balloon payments and longer amortizations are often repriced and extended beyond the initial maturity when credit conditions remain satisfactory. Demand loans, loans having no stated schedule of repayments and no stated maturity, and overdrafts are reported below as due in one year or less. See “Risk Management – Credit Risk and Allowance for Credit Losses” in this Item 7 for information regarding the risk elements applicable to, and a summary of our loan loss experience with respect to, the loans in each of the categories listed below.
| One Year or Less |
After One Year
Through Five Years |
After Five Years Through Fifteen Years | After Fifteen Years | Total | |||||||||||||||||||||||||
|
Commercial, financial, agricultural
(1)
|
$ | 797,384 | $ | 1,632,374 | $ | 106,879 | $ | 347 | $ | 2,536,984 | |||||||||||||||||||
| Lease financing, net of unearned income | 5,985 | 50,033 | 19,844 | — | 75,862 | ||||||||||||||||||||||||
| Real estate – construction: | |||||||||||||||||||||||||||||
| Residential | 195,999 | 4,099 | 33,684 | 12,891 | 246,673 | ||||||||||||||||||||||||
| Commercial | 418,800 | 151,517 | 41,114 | — | 611,431 | ||||||||||||||||||||||||
| Total real estate – construction | 614,799 | 155,616 | 74,798 | 12,891 | 858,104 | ||||||||||||||||||||||||
| Real estate – 1-4 family mortgage: | |||||||||||||||||||||||||||||
| Primary | 189,038 | 416,288 | 808,805 | 336,820 | 1,750,951 | ||||||||||||||||||||||||
| Home equity | 480,757 | 19,633 | 6,956 | 5,814 | 513,160 | ||||||||||||||||||||||||
| Rental/investment | 68,715 | 198,744 | 28,644 | 261 | 296,364 | ||||||||||||||||||||||||
| Land development | 113,126 | 23,840 | 867 | — | 137,833 | ||||||||||||||||||||||||
| Total real estate – 1-4 family mortgage | 851,636 | 658,505 | 845,272 | 342,895 | 2,698,308 | ||||||||||||||||||||||||
| Real estate – commercial mortgage: | |||||||||||||||||||||||||||||
| Owner-occupied | 341,669 | 859,220 | 454,948 | 1,969 | 1,657,806 | ||||||||||||||||||||||||
| Non-owner occupied | 1,026,615 | 1,347,536 | 373,242 | 74 | 2,747,467 | ||||||||||||||||||||||||
| Land development | 65,838 | 80,142 | 3,599 | — | 149,579 | ||||||||||||||||||||||||
| Total real estate – commercial mortgage | 1,434,122 | 2,286,898 | 831,789 | 2,043 | 4,554,852 | ||||||||||||||||||||||||
| Installment loans to individuals | 35,319 | 71,206 | 101,541 | 1,471 | 209,537 | ||||||||||||||||||||||||
| Total loans, net of unearned income | $ | 3,739,245 | $ | 4,854,632 | $ | 1,980,123 | $ | 359,647 | $ | 10,933,647 | |||||||||||||||||||
(1)
Includes PPP loans of $1,128,703 as of December 31, 2020.
40
The following table sets forth the fixed and variable rate loans maturing or scheduled to reprice after one year as of December 31, 2020:
| Interest Sensitivity | |||||||||||
|
Fixed
Rate |
Variable
Rate |
||||||||||
| Commercial, financial, agricultural | $ | 1,554,082 | $ | 185,518 | |||||||
| Lease financing, net of unearned income | 69,876 | — | |||||||||
| Real estate – construction: | |||||||||||
| Residential | 11,276 | 39,398 | |||||||||
| Commercial | 125,402 | 67,229 | |||||||||
| Total real estate – construction | 136,678 | 106,627 | |||||||||
| Real estate – 1-4 family mortgage: | |||||||||||
| Primary | 482,888 | 1,079,025 | |||||||||
| Home equity | 6,699 | 25,703 | |||||||||
| Rental/investment | 215,757 | 11,892 | |||||||||
| Land development | 21,870 | 2,837 | |||||||||
| Total real estate – 1-4 family mortgage | 727,214 | 1,119,457 | |||||||||
| Real estate – commercial mortgage: | |||||||||||
| Owner-occupied | 1,181,283 | 134,854 | |||||||||
| Non-owner occupied | 1,422,919 | 297,933 | |||||||||
| Land development | 64,680 | 19,061 | |||||||||
| Total real estate – commercial mortgage | 2,668,882 | 451,848 | |||||||||
| Installment loans to individuals | 169,538 | 4,682 | |||||||||
| Total loans, net of unearned income | $ | 5,326,270 | $ | 1,868,132 | |||||||
Deposits
| Noninterest-Bearing Deposits to Total Deposits | ||||||||
| 2020 | 2019 | |||||||
| 30.56% | 24.99% | |||||||
The Company relies on deposits as its major source of funds. Total deposits were $12,059,081 and $10,213,168 at December 31, 2020 and 2019, respectively. Noninterest-bearing deposits were $3,685,048 and $2,551,770 at December 31, 2020 and 2019, respectively, while interest-bearing deposits were $8,374,033 and $7,661,398 at December 31, 2020 and 2019, respectively. The growth in noninterest-bearing deposits across the Company’s footprint during 2020 was driven by the Company’s PPP lending, other government stimulus and client sentiment to maintain liquidity.
Management continues to focus on growing and maintaining a stable source of funding, specifically noninterest-bearing deposits and other core deposits. Non-interest bearing deposits increased to 30.56% of total deposits at December 31, 2020, as compared to 24.99% of total deposits at December 31, 2019. Under certain circumstances, however, management may elect to acquire non-core deposits in the form of time deposits or public fund deposits (which are deposits of counties, municipalities or other political subdivisions). The source of funds that we select depends on the terms and how those terms assist us in mitigating interest rate risk, maintaining our liquidity position and managing our net interest margin. Accordingly, funds are acquired to meet anticipated funding needs at the rate and with other terms that, in management's view, best address our interest rate risk, liquidity and net interest margin parameters.
Public fund deposits may be readily obtained based on the Company’s pricing bid in comparison with competitors. Since public fund deposits are obtained through a bid process, these deposit balances may fluctuate as competitive and market forces change. Although the Company has focused on growing core deposits to reduce reliance on public fund deposits, we participate in the bidding process for these deposits when pricing and other terms make it reasonable under the circumstances given market conditions or when management perceives that other factors, such as the public entity’s use of our treasury management or
41
other products and services, make such participation advisable. Our public fund transaction accounts are principally obtained from municipalities including school boards and utilities. Public fund deposits at December 31, 2020 were $1,398,330 compared to $1,367,827 at December 31, 2019.
Deposits that are in excess of the FDIC insurance limit (or similar state deposit insurance limits) and that are otherwise uninsured were $3,348,376 and $2,444,774 at December 31, 2020 and 2019, respectively. The following table shows the maturity of time deposits at December 31, 2020 that are in excess of the FDIC insurance limit (or similar state deposit insurance limits) and that are otherwise uninsured:
| Three Months or Less | $ | 116,417 | |||
| Over Three through Six Months | 50,202 | ||||
| Over Six through Twelve Months | 132,184 | ||||
| Over 12 Months | 108,959 | ||||
| $ | 407,762 | ||||
Borrowed Funds
Total borrowings include federal funds purchased, securities sold under agreements to repurchase, advances from the Federal Home Loan Bank (“FHLB”), subordinated notes and junior subordinated debentures and are classified on the Consolidated Balance Sheets as either short-term borrowings or long-term debt. Short-term borrowings have original maturities less than one year and typically include federal funds purchased, securities sold under agreements to repurchase, and short-term FHLB advances. During 2020, we used the proceeds of our deposit growth and other sources of liquidity to substantially reduce our short-term borrowings. The following table presents our short-term borrowings by type at December 31:
| 2020 | 2019 | ||||||||||
| Balance | Balance | ||||||||||
| Security repurchase agreements | $ | 10,947 | $ | 9,091 | |||||||
| Federal funds purchased | 10,393 | — | |||||||||
| Short-term borrowings from the FHLB | — | 480,000 | |||||||||
| $ | 21,340 | $ | 489,091 | ||||||||
At December 31, 2020, long-term debt consists of long-term FHLB advances, our junior subordinated debentures and our subordinated notes. The following table presents our long-term debt by type at December 31:
| 2020 | 2019 | ||||||||||
| Balance | Balance | ||||||||||
| Long-term FHLB advances | $ | 152,167 | $ | 152,337 | |||||||
| Junior subordinated debentures | 110,794 | 110,215 | |||||||||
| Subordinated notes | 212,009 | 113,955 | |||||||||
| $ | 474,970 | $ | 376,507 | ||||||||
Long-term FHLB borrowings are used to match-fund against large, fixed rate commercial or real estate loans with long-term maturities, which helps mitigate interest rate exposure when rates rise. In the fourth quarter of 2019, however, as interest rates declined following the Federal Reserve’s interest rate cuts, we used long-term FHLB borrowings as a source of liquidity in lieu of higher-costing deposits, which had not repriced as quickly following the interest rate cuts. At December 31, 2020, there were $100 in long-term FHLB advances outstanding scheduled to mature within twelve months or less. The Company had $3,784,520 of availability on unused lines of credit with the FHLB at December 31, 2020 compared to $3,159,942 at December 31, 2019. The weighted-average interest rates on outstanding advances at December 31, 2020 and 2019 were 0.05% and 1.53%, respectively.
On September 3, 2020, the Company completed the public offering and sale of $100,000 of its 4.50% fixed-to-floating rate subordinated notes due September 1, 2035. The subordinated notes were sold at par, resulting in net proceeds, after deducting underwriting discounts and offering expenses, of approximately $98,266. The Company intends to use the net proceeds from this offering for general corporate purposes, which may include providing capital to support the Company’s organic growth or
42
growth through strategic acquisitions, repaying indebtedness, financing investments, capital expenditures or for investments in Renasant Bank as regulatory capital.
The Company owns other subordinated notes, the proceeds of which have been used for general corporate purposes similar to those described above. The subordinated notes qualify as Tier 2 capital under the current regulatory guidelines.
The Company owns the outstanding common securities of business trusts that issued corporation-obligated mandatorily redeemable preferred capital securities to third-party investors. The trusts used the proceeds from the issuance of their preferred capital securities and common securities (collectively referred to as “capital securities”) to buy floating rate junior subordinated debentures issued by the Company (or by companies that the Company subsequently acquired). The debentures are the trusts’ only assets and interest payments from the debentures finance the distributions paid on the capital securities.
For more information about the terms and conditions of the Company’s junior subordinated debentures and subordinated notes, see Note 12, “Long-Term Debt,” in the Notes to the Consolidated Financial Statements in Item 8, Financial Statements and Supplementary Data, in this report.
Results of Operations
Net Income
Net income for the year ended December 31, 2020 was $83,651 compared to net income of $167,596 for the year ended December 31, 2019. Basic earnings per share for the year ended December 31, 2020 was $1.49 as compared to $2.89 for the year ended December 31, 2019. Diluted earnings per share for the year ended December 31, 2020 was $1.48 as compared to $2.88 for the year ended December 31, 2019.
From time to time, the Company incurs expenses and charges in connection with certain transactions with respect to which management is unable to accurately predict when these expenses or charges will be incurred or, when incurred, the amount of such expenses or charges. The following table presents the impact of these expenses and charges on reported EPS for the dates presented. The “COVID-19 related expenses” line item in the table below primarily consists of (a) employee overtime and employee benefit accruals directly related to the Company’s response to both the COVID-19 pandemic itself and federal legislation enacted to address the pandemic, such as the CARES Act, and (b) expenses associated with supplying branches with protective equipment, sanitation supplies (such as floor markings and cautionary signage for branches, face coverings and hand sanitizer) and more frequent and rigorous branch cleaning. The mortgage servicing rights (“MSR”) valuation adjustment is discussed below under the “Noninterest Income” heading and the restructuring charges and swap termination charges are discussed below under the “Noninterest Expense” heading in this Item.
| Twelve Months Ended December 31, | |||||||||||||||||||||||
| 2020 | 2019 | ||||||||||||||||||||||
| Pre-tax | After-tax | Impact to Diluted EPS | Pre-tax | After-tax | Impact to Diluted EPS | ||||||||||||||||||
| MSR valuation adjustment | $ | 11,726 | $ | 9,450 | $ | 0.17 | $ | 1,836 | $ | 1,427 | $ | 0.03 | |||||||||||
| COVID-19 related expenses | 10,343 | 8,336 | 0.14 | — | — | — | |||||||||||||||||
| Restructuring charges | 7,365 | 5,936 | 0.11 | — | — | — | |||||||||||||||||
| Swap termination charges | 2,040 | 1,644 | 0.03 | — | — | — | |||||||||||||||||
| Debt prepayment penalty | 121 | 97 | — | 54 | 41 | — | |||||||||||||||||
| Merger and conversion expenses | — | — | — | 279 | 216 | — | |||||||||||||||||
Net Interest Income
Net interest income, the difference between interest earned on assets and the cost of interest-bearing liabilities, is the largest component of our net income, comprising 64.80% of total net revenue in 2020. Total net revenue consists of net interest income on a fully taxable equivalent basis and noninterest income. The primary concerns in managing net interest income are the volume, mix and repricing of assets and liabilities.
Net interest income decreased 3.80% to $426,797 for 2020 compared to $443,657 in 2019. On a tax equivalent basis, net interest income decreased $16,304 to $433,682 in 2020 as compared to $449,986 in 2019. Net interest margin was 3.44% for 2020 as compared to 4.08% for 2019.
43
The following table sets forth the daily average balance sheet data, including all major categories of interest-earning assets and interest-bearing liabilities, together with the interest earned or interest paid and the average yield or average rate on each such category for the years ended December 31, 2020, 2019 and 2018:
| 2020 | 2019 | 2018 | |||||||||||||||||||||||||||||||||||||||||||||||||||
|
Average
Balance |
Interest
Income/ Expense |
Yield/
Rate |
Average
Balance |
Interest
Income/ Expense |
Yield/
Rate |
Average
Balance |
Interest
Income/ Expense |
Yield/
Rate |
|||||||||||||||||||||||||||||||||||||||||||||
| Assets | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Interest-earning assets: | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Loans: | |||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Non purchased
(1)
|
$ | 7,927,817 | $ | 333,296 | 4.20 | % | $ | 6,784,132 | $ | 337,672 | 4.98 | % | $ | 6,019,177 | $ | 286,643 | 4.76 | % | |||||||||||||||||||||||||||||||||||
| Purchased | 1,807,354 | 101,785 | 5.63 | % | 2,384,423 | 149,568 | 6.27 | % | 2,162,410 | 132,199 | 6.11 | % | |||||||||||||||||||||||||||||||||||||||||
| Paycheck Protection Program | 858,385 | 23,605 | 2.75 | % | — | — | — | % | — | — | — | % | |||||||||||||||||||||||||||||||||||||||||
| Total Loans | 10,593,556 | 458,686 | 4.33 | % | 9,168,555 | 487,240 | 5.31 | % | 8,181,587 | 418,842 | 5.12 | % | |||||||||||||||||||||||||||||||||||||||||
| Loans held for sale | 361,391 | 12,191 | 3.37 | % | 358,735 | 18,171 | 5.07 | % | 270,270 | 12,892 | 4.77 | % | |||||||||||||||||||||||||||||||||||||||||
| Securities: | |||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Taxable
(2)
|
1,021,999 | 24,102 | 2.36 | % | 1,051,124 | 29,786 | 2.83 | % | 844,692 | 23,713 | 2.81 | % | |||||||||||||||||||||||||||||||||||||||||
|
Tax-exempt
|
259,705 | 8,848 | 3.41 | % | 193,252 | 7,821 | 4.05 | % | 217,190 | 9,232 | 4.25 | % | |||||||||||||||||||||||||||||||||||||||||
| Total securities | 1,281,704 | 32,950 | 2.57 | % | 1,244,376 | 37,607 | 3.02 | % | 1,061,882 | 32,945 | 3.10 | % | |||||||||||||||||||||||||||||||||||||||||
| Interest-bearing balances with banks | 385,810 | 1,190 | 0.31 | % | 256,374 | 5,891 | 2.30 | % | 148,677 | 3,076 | 2.07 | % | |||||||||||||||||||||||||||||||||||||||||
| Total interest-earning assets | 12,622,461 | 505,017 | 4.00 | % | 11,028,040 | 548,909 | 4.98 | % | 9,662,416 | 467,755 | 4.84 | % | |||||||||||||||||||||||||||||||||||||||||
| Cash and due from banks | 201,815 | 179,991 | 163,286 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Intangible assets | 973,287 | 976,065 | 747,008 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Other assets | 705,886 | 691,890 | 531,857 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Total assets | $ | 14,503,449 | $ | 12,875,986 | $ | 11,104,567 | |||||||||||||||||||||||||||||||||||||||||||||||
| Liabilities and shareholders’ equity | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Interest-bearing liabilities: | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Deposits: | |||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Interest-bearing demand
(3)
|
$ | 5,277,374 | $ | 23,995 | 0.45 | % | $ | 4,754,201 | $ | 40,991 | 0.86 | % | $ | 4,246,585 | $ | 23,678 | 0.56 | % | |||||||||||||||||||||||||||||||||||
| Savings deposits | 764,146 | 758 | 0.10 | % | 647,271 | 1,258 | 0.19 | % | 596,990 | 868 | 0.15 | % | |||||||||||||||||||||||||||||||||||||||||
| Time deposits | 1,952,213 | 29,263 | 1.50 | % | 2,320,775 | 39,746 | 1.71 | % | 2,040,675 | 25,214 | 1.24 | % | |||||||||||||||||||||||||||||||||||||||||
| Total interest-bearing deposits | 7,993,733 | 54,016 | 0.68 | % | 7,722,247 | 81,995 | 1.06 | % | 6,884,250 | 49,760 | 0.72 | % | |||||||||||||||||||||||||||||||||||||||||
| Borrowed funds | 765,769 | 17,319 | 2.26 | % | 405,975 | 16,928 | 4.17 | % | 388,077 | 15,569 | 4.01 | % | |||||||||||||||||||||||||||||||||||||||||
| Total interest-bearing liabilities | 8,759,502 | 71,335 | 0.81 | % | 8,128,222 | 98,923 | 1.22 | % | 7,272,327 | 65,329 | 0.90 | % | |||||||||||||||||||||||||||||||||||||||||
| Noninterest-bearing deposits | 3,391,619 | 2,463,436 | 2,036,754 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Other liabilities | 237,738 | 176,496 | 94,152 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Shareholders’ equity | 2,114,590 | 2,107,832 | 1,701,334 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Total liabilities and shareholders’ equity | $ | 14,503,449 | $ | 12,875,986 | $ | 11,104,567 | |||||||||||||||||||||||||||||||||||||||||||||||
| Net interest income/ net interest margin | $ | 433,682 | 3.44 | % | $ | 449,986 | 4.08 | % | $ | 402,426 | 4.16 | % | |||||||||||||||||||||||||||||||||||||||||
(1)
Shown net of unearned income.
(2)
U.S. Government and some U.S. Government Agency securities are tax-exempt in the states in which we operate.
(3)
Interest-bearing demand deposits include interest-bearing transactional accounts and money market deposits.
The daily average balances of nonaccruing assets are included in the foregoing table. Interest income and weighted average yields on tax-exempt loans and securities have been computed on a fully tax equivalent basis assuming a federal tax rate of 21% and a state tax rate of 4.45%, which is net of federal tax benefit.
Net interest income and net interest margin are influenced by internal and external factors. Internal factors include balance sheet changes in volume and mix as well as loan and deposit pricing decisions. External factors include changes in market interest rates, competition and the shape of the interest rate yield curve. As discussed in more detail below, the decline in loan yields as a result of the Federal Reserve’s decision to cut interest rates in response to the COVID-19 pandemic, as well as changes in the mix of earning assets during the year due to increased liquidity on the balance sheet, were the largest
44
contributing factors to the decrease in net interest income. The Company has continued to focus on lowering the cost of funding through growing noninterest-bearing deposits and aggressively lowering interest rates on interest-bearing deposits.
The following table sets forth a summary of the changes in interest earned, on a tax equivalent basis, and interest paid resulting from changes in volume and rates for the Company for the years indicated. Information is provided in each category with respect to changes attributable to (1) changes in volume (changes in volume multiplied by prior yield/rate); (2) changes in yield/rate (changes in yield/rate multiplied by prior volume); and (3) changes in both yield/rate and volume (changes in yield/rate multiplied by changes in volume). The changes attributable to the combined impact of yield/rate and volume have been allocated on a pro-rata basis using the absolute ratio value of amounts calculated.
| 2020 Compared to 2019 | 2019 Compared to 2018 | ||||||||||||||||||||||||||||||||||
| Volume | Rate | Net | Volume | Rate | Net | ||||||||||||||||||||||||||||||
| Interest income: | |||||||||||||||||||||||||||||||||||
| Loans: | |||||||||||||||||||||||||||||||||||
| Not purchased | $ | 52,323 | $ | (56,699) | $ | (4,376) | $ | 37,643 | $ | 13,386 | $ | 51,029 | |||||||||||||||||||||||
| Purchased | (33,597) | (14,186) | (47,783) | 13,855 | 3,514 | 17,369 | |||||||||||||||||||||||||||||
| Paycheck Protection Program | 23,605 | — | 23,605 | — | — | — | |||||||||||||||||||||||||||||
| Loans held for sale | 134 | (6,114) | (5,980) | 4,068 | 1,211 | 5,279 | |||||||||||||||||||||||||||||
| Securities: | |||||||||||||||||||||||||||||||||||
| Taxable | (806) | (4,878) | (5,684) | 5,848 | 225 | 6,073 | |||||||||||||||||||||||||||||
| Tax-exempt | 2,398 | (1,371) | 1,027 | (984) | (427) | (1,411) | |||||||||||||||||||||||||||||
| Interest-bearing balances with banks | 2,026 | (6,727) | (4,701) | 2,442 | 373 | 2,815 | |||||||||||||||||||||||||||||
| Total interest-earning assets | 46,083 | (89,975) | (43,892) | 62,872 | 18,282 | 81,154 | |||||||||||||||||||||||||||||
| Interest expense: | |||||||||||||||||||||||||||||||||||
| Interest-bearing demand deposits | 4,108 | (21,104) | (16,996) | 3,108 | 14,205 | 17,313 | |||||||||||||||||||||||||||||
| Savings deposits | 197 | (697) | (500) | 78 | 312 | 390 | |||||||||||||||||||||||||||||
| Time deposits | (5,871) | (4,612) | (10,483) | 3,811 | 10,721 | 14,532 | |||||||||||||||||||||||||||||
| Borrowed funds | 10,475 | (10,084) | 391 | 733 | 626 | 1,359 | |||||||||||||||||||||||||||||
| Total interest-bearing liabilities | 8,909 | (36,497) | (27,588) | 7,730 | 25,864 | 33,594 | |||||||||||||||||||||||||||||
| Change in net interest income | $ | 37,174 | $ | (53,478) | $ | (16,304) | $ | 55,142 | $ | (7,582) | $ | 47,560 | |||||||||||||||||||||||
The daily average balances of nonaccruing assets are included in the foregoing table. Interest income and weighted average yields on tax-exempt loans and securities have been computed on a fully tax equivalent basis assuming a federal tax rate of 21% and a state tax rate of 4.45%, which is net of federal tax benefit.
Interest income, on a tax equivalent basis, was $505,017 for 2020 compared to $548,909 for 2019, a decrease of $43,892. The following table presents the percentage of total average earning assets, by type and yield, for 2020 and 2019:
| Percentage of Total | Yield | ||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
| Loans held for investment excluding PPP loans | 77.13 | % | 83.15 | % | 4.47 | % | 5.31 | % | |||||||||||||||
| Paycheck Protection Program | 6.80 | — | 2.75 | — | |||||||||||||||||||
| Loans held for sale | 2.86 | 3.25 | 3.37 | 5.07 | |||||||||||||||||||
| Securities | 10.15 | 11.28 | 2.57 | 3.02 | |||||||||||||||||||
| Interest-bearing balances with banks | 3.06 | 2.32 | 0.31 | 2.30 | |||||||||||||||||||
| Total earning assets | 100.00 | % | 100.00 | % | 4.00 | % | 4.98 | % | |||||||||||||||
In 2020, interest income on loans held for investment, on a tax equivalent basis, decreased $28,554 to $458,686 from $487,240 in 2019. Interest income on loans held for investment decreased primarily due to decreases in loan yields in response to the Federal Reserve’s rate cuts and the funding of PPP loans during the year, which by law bear a fixed interest rate of 1.0%, significantly lower than the yield on loans originated in the ordinary course of business. During 2020, interest income attributable to PPP loans included in loan interest income was $23,605, which consisted of $8,729 in interest income and $14,876 in accretion of net origination fees. The PPP origination fees, net of agent fees paid and other origination costs, are being accreted into interest income over the life of the loan. If a PPP loan is forgiven in whole or in part, as provided under the CARES Act, the Company will recognize the non-accreted portion of the net origination fee attributable to the forgiven portion
45
of such loan as of the date of the final forgiveness determination. PPP loans reduced margin and loan yield by 5 basis points and 13 basis points, respectively, during 2020.
Interest income on loans held for sale, on a tax equivalent basis, decreased $5,980 to $12,191 in 2020 from $18,171 in 2019. This decrease is primarily due to the decline in interest rates in 2020, as well as the impact of the portfolio of non-mortgage consumer loans that was classified as held for sale until the third quarter of 2019 when the portfolio was reclassified to loans held for investment. The transfer of the higher earning assets out of loans held for sale coupled with the lower rates earned on mortgage loans held for sale during 2020 accounts for the decrease in interest income on loans held for sale from 2019. The following table presents reported taxable equivalent yield on loans for the periods presented:
| Twelve months ended December 31, | |||||||||||
| 2020 | 2019 | ||||||||||
| Taxable equivalent interest income on loans | $ | 470,877 | $ | 505,411 | |||||||
| Average loans, including loans held for sale | $ | 10,954,947 | $ | 9,527,290 | |||||||
| Loan yield | 4.30 | % | 5.30 | % | |||||||
The impact from interest income collected on problem loans and purchase accounting adjustments on purchased loans to total interest income on loans, loan yield and net interest margin is shown in the table below for the periods presented:
| Twelve months ended December 31, | |||||||||||
| 2020 | 2019 | ||||||||||
| Net interest income collected on problem loans | $ | 1,011 | $ | 4,042 | |||||||
|
Accretable yield recognized on purchased loans
(1)
|
19,248 | 27,227 | |||||||||
| Total impact to interest income on loans | $ | 20,259 | $ | 31,269 | |||||||
| Impact to total loan yield | 0.18 | % | 0.33 | % | |||||||
| Impact to net interest margin | 0.16 | % | 0.28 | % | |||||||
(1)
Includes additional interest income recognized in connection with the acceleration of paydowns and payoffs from purchased loans of $8,077 and $14,635 for the twelve months ended December 31, 2020 and 2019, respectively, which increased loan yield by 7 basis points and 15 basis points, respectively, for 2020 and 2019.
In 2020, investment income, on a tax equivalent basis, decreased $4,657 to $32,950 from $37,607 in 2019. The following table presents the taxable equivalent yield on securities for the periods presented:
| Twelve months ended December 31, | |||||||||||
| 2020 | 2019 | ||||||||||
| Taxable equivalent interest income on securities | $ | 32,950 | $ | 37,607 | |||||||
| Average securities | $ | 1,281,704 | $ | 1,244,376 | |||||||
| Taxable equivalent yield on securities | 2.57 | % | 3.02 | % | |||||||
Although the average balance in the investment portfolio slightly increased in 2020 as compared to 2019, the tax equivalent yield on securities was down, and as a result, investment income, on a tax equivalent basis, decreased in 2020. The decrease in taxable equivalent yield on securities was a result of an increase in premium amortization caused by the increase in prepayment speeds experienced in the Company's mortgage backed securities portfolio given the current interest rate environment.
46
Interest expense was $71,335 in 2020 compared to $98,923 in 2019. The following table presents, by type, the Company’s funding sources, which consist of total average deposits and borrowed funds, and the total cost of each funding source for each of the years presented:
| Percentage of Total | Cost of Funds | ||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
| Noninterest-bearing demand | 27.91 | % | 23.26 | % | — | % | — | % | |||||||||||||||
| Interest-bearing demand | 43.43 | 44.89 | 0.45 | 0.86 | |||||||||||||||||||
| Savings | 6.29 | 6.11 | 0.10 | 0.19 | |||||||||||||||||||
| Time deposits | 16.07 | 21.91 | 1.50 | 1.71 | |||||||||||||||||||
| Short-term borrowings | 2.94 | 1.17 | 1.07 | 2.43 | |||||||||||||||||||
| Long-term Federal Home Loan Bank advances | 1.25 | 0.35 | 0.61 | 1.51 | |||||||||||||||||||
| Subordinated notes | 1.20 | 1.27 | 5.28 | 6.24 | |||||||||||||||||||
| Other long-term borrowed funds | 0.91 | 1.04 | 4.40 | 4.48 | |||||||||||||||||||
| Total deposits and borrowed funds | 100.00 | % | 100.00 | % | 0.59 | % | 0.93 | % | |||||||||||||||
Interest expense on deposits was $54,016 and $81,995 for 2020 and 2019, respectively. The cost of total deposits was 0.47% and 0.81% for the years ending December 31, 2020 and 2019, respectively. The cost of interest-bearing deposits was 0.68% and 1.06% for the same periods. The decrease in both deposit expense and cost is attributable to the Company’s efforts to reduce deposit rates in order to mitigate the effect of the Federal Reserve’s rate cuts on the Company’s loan yields. During 2020, the Company continued its efforts to grow non-interest bearing deposits, with the growth in non-interest bearing deposits during the year being primarily driven by the Company’s PPP lending, other government stimulus and client sentiment. Low cost deposits continue to be the preferred choice of funding; however, the Company may rely on wholesale borrowings when rates are advantageous.
Interest expense on total borrowings was $17,319 and $16,928 for the years ending December 31, 2020 and 2019, respectively, while the cost of total borrowings was 2.26% and 4.17% for the years ended December 31, 2020 and 2019, respectively. The increase in interest expense as a result of higher average borrowings was offset by lower interest rates charged on our FHLB advances during 2020. As previously mentioned, the Company also issued $100,000 of its fixed-to-floating rate subordinated notes during the year.
A more detailed discussion of the cost of our funding sources is set forth below under the heading “Liquidity and Capital Resources” in this item. For more information about our outstanding subordinated notes and junior subordinated debentures, see Note 12, “Long-Term Debt,” in the Notes to Consolidated Financial Statements in Item 8, Financial Statements and Supplementary Data, in this report.
Noninterest Income
| Noninterest Income to Average Assets | ||||||||
| (Excludes securities gains/losses) | ||||||||
| 2020 | 2019 | |||||||
| 1.62% | 1.19% | |||||||
Total noninterest income includes fees generated from deposit services and other fees and commissions, income from our insurance, wealth management and mortgage banking operations, realized gains on the sale of securities and all other noninterest income. Our focus is to develop and enhance our products that generate noninterest income in order to diversify our revenue sources. Noninterest income as a percentage of total net revenues was 35.20% and 25.41% for 2020 and 2019, respectively. Noninterest income was $235,532 for the year ended December 31, 2020, an increase of $82,278, or 53.69%, as compared to $153,254 for 2019. The increase during the year was driven by strong mortgage banking production due to the historically low mortgage interest rates.
Service charges on deposit accounts include maintenance fees on accounts, per item charges, account enhancement charges for additional packaged benefits and overdraft fees. Service charges on deposit accounts were $31,326 and $35,972 for the twelve months ended December 31, 2020 and 2019, respectively. Overdraft fees, the largest component of service charges on deposits, decreased to $18,597 for the twelve months ended December 31, 2020 compared to $23,097 for the same period in 2019. Management believes the decrease in 2020 relative to 2019 can be attributed to excess customer liquidity driven by the various government stimulus programs initiated in response to the COVID-19 pandemic as well as an overall decrease in consumer
47
spending as shelter-in-place orders and similar government restrictions were imposed across the country due to the COVID-19 pandemic.
Fees and commissions decreased to $13,043 in 2020 as compared to $19,430 for the same period in 2019. Fees and commissions include fees related to deposit services, such as ATM fees and interchange fees on debit card transactions. Interchange fees on debit card transactions, the largest component of fees and commissions, were $8,979 for the twelve months ended December 31, 2020 compared to $15,352 for the same period in 2019. Effective July 1, 2019, we became subject to the limitations on interchange fees imposed pursuant to the Durbin Amendment. The Durbin Amendment limitations reduced interchange fees by approximately $12,000 during 2020 and $6,000 over the last half of 2019.
Through Renasant Insurance, we offer a range of commercial and personal insurance products through major insurance carriers. Income earned on insurance products was $8,990 and $8,919 for the years ended December 31, 2020 and 2019, respectively. Contingency income is a bonus received from the insurance underwriters and is based both on commission income and claims experience on our clients’ policies during the previous year. Increases and decreases in contingency income are reflective of corresponding increases and decreases in the amount of claims paid by insurance carriers. Contingency income, which is included in the “Other noninterest income” line item on the Consolidated Statements of Income, was $934 and $828 for 2020 and 2019, respectively.
Our Wealth Management segment has two primary divisions: Trust and Financial Services. The Trust division operates on a custodial basis which includes administration of benefit plans, as well as accounting and money management for trust accounts. The division manages a number of trust accounts inclusive of personal and corporate benefit accounts, IRAs, and custodial accounts. Fees for managing these accounts are based on changes in market values of the assets under management in the account, with the amount of the fee depending on the type of account. The Financial Services division provides specialized products and services to our customers, which include fixed and variable annuities, mutual funds, and stocks offered through a third party provider. Wealth Management revenue was $16,504 for 2020 compared to $14,433 for 2019. The market value of assets under management or administration was $4,196,072 and $3,888,253 at December 31, 2020 and 2019, respectively.
Mortgage banking income is derived from the origination and sale of mortgage loans and the servicing of mortgage loans that the Company has sold but retained the right to service. Although loan fees and some interest income are derived from mortgage loans held for sale, the main source of income is gains from the sale of these loans in the secondary market. Originations of mortgage loans to be sold totaled $4,479,421 in 2020 and $2,381,178 in 2019. The increase in mortgage loan originations is due to the current interest rate environment. Mortgage banking income, was negatively impacted during 2020 and 2019 by a mortgage servicing rights valuation adjustment of $11,726 and $1,836, as actual prepayment speeds of the mortgages the Company serviced exceeded the Company’s estimates of prepayment speeds.
The following table presents the components of mortgage banking income included in noninterest income at December 31:
| 2020 | 2019 | ||||||||||
| Gain on sales of loans, net | $ | 150,406 | $ | 45,854 | |||||||
| Fees, net | 18,914 | 11,385 | |||||||||
| Mortgage servicing income, net | (7,095) | 2,493 | |||||||||
| MSR valuation adjustment | (11,726) | (1,836) | |||||||||
| Mortgage banking income, net | $ | 150,499 | $ | 57,896 | |||||||
Noninterest income for the twelve months ended December 31, 2020 includes the Company’s net gains on sale of securities of $46, as the Company sold securities with a carrying value $44,860 at the time of sale for net proceeds of $44,906. Gains on sales of securities for the twelve months ended 2019 were $348, resulting from the sale of approximately $212,137 in securities. For more information on securities sold during the two year period ended December 31, 2020, see Note 2, “Securities,” in the Notes to Consolidated Financial Statements in Item 8, Financial Statements and Supplementary Data, in this report.
Bank-owned life insurance (“BOLI”) income is derived from changes in the cash surrender value of the bank-owned life insurance policies and can fluctuate upon the collection of death benefit proceeds. BOLI income decreased to $5,627 in 2020 as compared to $6,109 for the same period in 2019.
In addition to the contingency income described above, other noninterest income includes income from our SBA banking division, and other miscellaneous income and can fluctuate based on the claims experience in our Insurance agency, SBA
48
production and recognition of other nonseasonal income items. Other noninterest income was $9,497 for 2020 compared to $10,147 for 2019.
Noninterest Expense
| Noninterest Expense to Average Assets | ||||||||
| 2020 | 2019 | |||||||
| 3.25% | 2.91% | |||||||
Noninterest expense was $471,988 and $374,174 for 2020 and 2019, respectively. As mentioned previously, the Company incurred expenses in connection with certain transactions with respect to which management is unable to accurately predict when these expenses will be incurred or, when incurred, the amount of such expenses. The following table presents these expenses for the periods presented:
| Twelve Months Ended December 31, | |||||||||||
| 2020 | 2019 | ||||||||||
| COVID-19 related expenses | $ | 10,343 | $ | — | |||||||
| Restructuring charges | 7,365 | — | |||||||||
| Swap termination charges | 2,040 | — | |||||||||
| Debt prepayment penalty | 121 | 54 | |||||||||
| Merger and conversion expenses | — | 279 | |||||||||
As part of a continued focus on efficiency, the Company initiated a system-wide branch evaluation effort and offered a voluntary early retirement window program. The Company incurred $7,365 in restructuring charges related to these initiatives, which are expected to allow for a more efficient use of the Company’s workforce and branch network moving forward. The Company also incurred a $2,040 charge to terminate two swaps, which will reduce interest expense over the remaining terms of the swaps, which were originally scheduled to mature in June 2022 and 2023.
Salaries and employee benefits is the largest component of noninterest expense and represented 64.07% and 67.02% of total noninterest expense at December 31, 2020 and 2019, respectively. During 2020, salaries and employee benefits increased $51,604, or 20.58%, to $302,388 as compared to $250,784 for 2019. The increase in salaries and employee benefits is primarily due to the strategic production hires the Company made throughout its footprint during 2019, as well as increased mortgage commissions and incentives related to the increased mortgage production during 2020. Salaries and employee benefits for 2020 also includes approximately $8,237 in expense related to employee overtime and employee benefit accruals directly related to the Company’s response to both the COVID-19 pandemic itself and federal legislation enacted to address the pandemic, such as the CARES Act.
Compensation expense recorded in connection with awards of restricted stock, which is included within salaries and employee benefits, was $9,910 and $9,456 for 2020 and 2019, respectively. A portion of the restricted stock awards in both years was subject to the satisfaction of performance-based conditions.
Data processing costs increased $1,006 to $20,685 in 2020 from $19,679 in 2019. The Company continues to examine new and existing contracts to negotiate favorable terms to offset the increased variable cost components of our data processing costs, such as new accounts and increased transaction volume.
Net occupancy and equipment expense in 2020 was $54,080, an increase of $4,527, compared to $49,553 for 2019. Aside from the increase attributable to the additional locations added during 2019, the increase in net occupancy and equipment expense is also attributable to investments in our IT infrastructure in response to banking and governmental regulation and increased global risk from cyber security breaches.
Expenses related to other real estate owned for 2020 were $2,754, compared to $2,013 in 2019. Expenses on other real estate owned for 2020 include write downs of $2,160 of the carrying value to fair value on certain pieces of property held in other real estate owned compared to write downs of $1,265 in 2019. Other real estate owned with a cost basis of $8,415 was sold during 2020, resulting in a net gain of $23, compared to other real estate owned with a cost basis of $6,498 sold during 2019 for a net loss of $94.
Professional fees include fees for legal and accounting services, such as routine litigation matters, external audit services as well as assistance in complying with newly-enacted and existing banking and governmental regulation. Professional fees were $11,293 for 2020 as compared to $10,166 for 2019.
49
Advertising and public relations expense was $10,322 for 2020, a decrease of $1,285 compared to $11,607 for 2019. The decrease is primarily attributable to a reduction in sponsorship spending, as the COVID-19 pandemic has limited sporting and other public events.
Amortization of intangible assets totaled $7,121 for 2020 compared to $8,105 for 2019. This amortization relates to finite-lived intangible assets which are being amortized over the useful lives as determined at acquisition. These finite-lived intangible assets have remaining estimated useful lives ranging from approximately 2 months to approximately 9 years.
Communication expenses are those expenses incurred for communication to clients and between employees. Communication expenses were $8,866 for 2020 as compared to $8,858 for 2019.
Other noninterest expense includes the provision for unfunded commitments, business development and travel expenses, other discretionary expenses, loan fees expense and other miscellaneous fees and operating expenses. Other noninterest expense was $44,953 for 2020 as compared to $13,076 for 2019. The provision for unfunded commitments was $9,200 for 2020. No such provision was included in other noninterest expense for 2019. Also included in noninterest expense for 2020 were $2,106 in expenses incurred to supply our branches with protective equipment, sanitation supplies (such as floor markings and cautionary signage for branches, face coverings and hand sanitizer) and more frequent and rigorous branch cleaning in response to the COVID-19 pandemic.
Efficiency Ratio
| Efficiency Ratio | |||||||||||
| 2020 | 2019 | ||||||||||
| Efficiency ratio (GAAP) | 70.53% | 62.03% | |||||||||
|
Adjusted efficiency ratio (Non-GAAP)
(1)
|
64.00% | 60.48% | |||||||||
(1)
Adjusted efficiency ratio is a non-GAAP financial measure. A reconciliation of this financial measure from GAAP to non-GAAP as well as an explanation of why the Company provides non-GAAP financial measures can be found under the “Non-GAAP Financial Measures” heading at the end of this Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, in this report.
The efficiency ratio is a measure of productivity in the banking industry. (This ratio is a measure of our ability to turn expenses into revenue. That is, the ratio is designed to reflect the percentage of one dollar which must be expended to generate a dollar of revenue.) The Company calculates this ratio by dividing noninterest expense by the sum of net interest income on a fully tax equivalent basis and noninterest income. The table above shows the impact on the efficiency ratio of expenses that (1) the Company does not consider to be part of its core operating activities, such as amortization of intangibles, or (2) the Company incurred in connection with certain transactions where management is unable to accurately predict the timing of when these expenses will be incurred or, when incurred, the amount of such expenses, such as expenses incurred in connection with our response to the COVID-19 pandemic, our MSR valuation adjustment, restructuring and swap termination charges and the provision for unfunded commitments. We remain committed to aggressively managing our costs within the framework of our business model. Our goal is to improve the efficiency ratio over time from currently reported levels as a result of revenue growth while at the same time controlling noninterest expenses.
Income Taxes
Income tax expense for 2020 and 2019 was $19,840 and $48,091, respectively. The effective tax rates for those years were 19.40% and 22.30%, respectively. For additional information regarding the Company’s income taxes, please refer to in Note 15, “Income Taxes,” in the Notes to Consolidated Financial Statements in Item 8, Financial Statements and Supplementary Data, in this report.
50
Risk Management
The management of risk is an on-going process. Primary risks that are associated with the Company include credit, interest rate and liquidity risk. Credit and interest rate risk are discussed below, while liquidity risk is discussed in the next subsection under the heading “Liquidity and Capital Resources.”
Credit Risk and Allowance for Credit Losses on Loans and Unfunded Commitments
COVID-19 Update
. At December 31, 2020, the Company’s credit quality metrics remained strong. The Company is continuing to monitor all asset categories given that any category or borrower could be negatively impacted by the pandemic, with enhanced monitoring of loans remaining on deferral as well as a focus on those industries more highly impacted by the pandemic, primarily the hospitality and healthcare industries. In addition, in response to the current economic environment caused by the COVID-19 pandemic, the Company implemented a loan deferral program in the first quarter of 2020 to provide temporary payment relief to the Company’s borrowers – both consumer and commercial clients.
Under these programs, a qualified borrower can defer principal and interest payments for up to 90 days. Principal and interest payments can be deferred for up to 180 days on residential mortgage loans. To qualify, the borrower must have been current on loan payments, taxes and insurance at the time of the borrower’s application for payment deferral.
A second deferral is available to borrowers that remained current on taxes and insurance through the first deferral period and also satisfy underwriting standards established by the Company that analyze the ability of the customer to service its loan in accordance with its existing terms in light of the impact of the COVID-19 pandemic on the customer, its industry and the markets in which it operates.
The Company’s loan deferral program complies with the guidance set forth in the CARES Act and related guidance from the FDIC and other banking regulators. At December 31, 2020, the Company had 906 loans (not in thousands) on deferral with an aggregate balance of approximately $145,000, or 1.5% of our loan portfolio (excluding PPP loans) by dollar value.
In accordance with the applicable guidance, none of these loans were considered “restructured loans” and thus are not included in the discussion of our restructured loans below.
The Company’s credit quality in future quarters may be impacted by both external and internal factors related to the pandemic in addition to those factors that traditionally affect credit quality.
External factors outside the Company’s control include items such as the pace at which the COVID-19 vaccine is administered to residents in the Company’s markets and the United States generally, federal, state and local government measures, the re-imposition of “shelter-in-place” orders, and the economic impact of government programs, including additional fiscal stimulus and the re-opening of the Paycheck Protection Program. Internal factors that will potentially impact credit quality include items such as the Company’s loan deferral programs, involvement in government offered programs and the related financial impact of these programs. The impact of each of these items are unknown at this time and could materially and adversely impact future credit quality.
Management of Credit Risk
. Inherent in any lending activity is credit risk, that is, the risk of loss should a borrower default. Credit risk is monitored and managed on an ongoing basis by a credit administration department, a problem asset resolution committee and the Board of Directors Credit Review Committee.
Oversight of the Company’s lending operations (including adherence to our policies and procedures governing the loan approval and monitoring process), credit quality and loss mitigation are major concerns of credit administration and these committees. The Company’s central appraisal review department reviews and approves third-party appraisals obtained by the Company on real estate collateral and monitors loan maturities to ensure updated appraisals are obtained. This department is managed by a State Certified General Real Estate Appraiser and employs three additional State Certified General Real Estate Appraisers and four real estate evaluators. In addition, we maintain a loan review staff to independently monitor loan quality and lending practices. Loan review personnel monitor and, if necessary, adjust the grades assigned to loans through periodic examination, focusing their review on commercial and real estate loans rather than consumer and small balance consumer mortgage loans, such as 1-4 family mortgage loans.
In compliance with loan policy, the lending staff is given lending limits based on their knowledge and experience. In addition, each lending officer’s prior performance is evaluated for credit quality and compliance as a tool for establishing and enhancing lending limits. Before funds are advanced on consumer and commercial loans below certain dollar thresholds, loans are reviewed and scored using centralized underwriting methodologies. Loan quality, or “risk-rating,” grades are assigned based upon certain factors, which include the scoring of the loans. This information is used to assist management in monitoring credit quality. Loan requests are reviewed for approval by senior credit officers.
For commercial and commercial real estate secured loans, risk-rating grades are assigned by lending, credit administration and loan review personnel, based on an analysis of the financial and collateral strength and other credit attributes underlying each loan. Loan grades range from 1 to 9, with 1 rated loans having the least credit risk. For more information about the Company’s
51
loan grades, see the information under the heading “Credit Quality” in Note 3, “Non Purchased Loans,” in the Notes to Consolidated Financial Statements in Item 8, Financial Statements and Supplementary Data, in this report.
Management’s problem asset resolution committee and the Board of Directors’ Credit Review Committee monitor loans that are past due or those that have been downgraded and placed on the Company’s internal watch list due to a decline in the collateral value or cash flow of the debtor; the committees then adjust loan grades accordingly. This information is used to assist management in monitoring credit quality. When the ultimate collectability of a loan’s principal is in doubt, wholly or partially, the loan is placed on nonaccrual.
After all collection efforts have failed, collateral securing loans may be repossessed and sold or, for loans secured by real estate, foreclosure proceedings initiated. The collateral is sold at public auction for fair market value (based upon recent appraisals described in the above paragraph), with fees associated with the foreclosure being deducted from the sales price. The purchase price is applied to the outstanding loan balance. If the loan balance is greater than the sales proceeds, the deficient balance is sent to the Board of Directors’ Credit Review Committee for charge-off approval. These charge-offs reduce the allowance for credit losses on loans. Charge-offs reflect the realization of losses in the portfolio that were recognized previously through the provision for credit losses on loans.
The Company’s practice is to charge off estimated losses as soon as such loss is identified and reasonably quantified. Net charge-offs for 2020 were $3,852, or 0.04% as a percentage of average loans, compared to net charge-offs of $3,914, or 0.04% as a percentage of average loans, for 2019. The charge-offs in 2020 were fully reserved for in the Company’s allowance for credit losses.
Allowance for Credit Losses on Loans; Provision for Credit Losses on Loans
. On January 1, 2020, the Company began calculating the allowance for credit losses under CECL. As of the date of adoption, the Company increased the allowance for credit losses on loans by $42,484 and the reserve for unfunded commitments by $10,389. The allowance for credit losses is available to absorb credit losses inherent in the loans held for investment portfolio. Loan losses are charged against the allowance for credit losses when management believes the uncollectability of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. Management evaluates the adequacy of the allowance on a quarterly basis. Please refer to the information in the “Critical Accounting Policies” section above under the headings “Allowance for Credit Losses” and “Business Combinations, Accounting for Purchased Loans” for an in-depth discussion of our accounting policies and our methodology for determining the appropriate level of the allowance for credit losses.
In addition to its quarterly analysis of the allowance for credit losses, on a regular basis, management and the Board of Directors review loan ratios. These ratios include the allowance for credit losses as a percentage of total loans, net charge-offs as a percentage of average loans, the provision for credit losses
as a percentage of average loans, nonperforming loans as a percentage of total loans and the allowance coverage on nonperforming loans. Also, management reviews past due ratios by officer, community bank and the Company as a whole.
The allowance for credit losses on loans was $176,144 and $52,162 at December 31, 2020 and 2019, respectively. The following table presents the allocation of the allowance for credit losses on loans and the percentage of each loan category to total loans at December 31 for each of the years presented.
| 2020 | 2019 | ||||||||||||||||
| Balance | % of Total | Balance | % of Total | ||||||||||||||
| Commercial, financial, agricultural | $ | 39,031 | 23.20 | % | $ | 10,658 | 14.12 | % | |||||||||
| Lease financing | 1,624 | 0.69 | % | 910 | 0.84 | % | |||||||||||
| Real estate – construction | 16,047 | 7.85 | % | 5,029 | 8.53 | % | |||||||||||
| Real estate – 1-4 family mortgage | 32,165 | 24.68 | % | 9,814 | 29.59 | % | |||||||||||
| Real estate – commercial mortgage | 76,127 | 41.66 | % | 24,990 | 43.80 | % | |||||||||||
| Installment loans to individuals | 11,150 | 1.92 | % | 761 | 3.12 | % | |||||||||||
| Total | $ | 176,144 | 100.00 | % | $ | 52,162 | 100.00 | % | |||||||||
The provision for credit losses on loans charged to operating expense is an amount that, in the judgment of management, is necessary to maintain the allowance for credit losses on loans at a level that is believed to be adequate to meet the inherent risks of losses in our loan portfolio. The provision for credit losses on loans was $85,350 and $7,050 for 2020 and 2019, respectively. The provision recorded during 2020 was primarily driven by the current and future economic uncertainty caused by the COVID-19 pandemic, including the current projections of an improving but continued elevated national unemployment rate
52
into 2021 and 2022 and nominal GDP growth relative to pre-pandemic levels. The Company also factored into its estimate the potential benefit and risk of the government programs implemented through the CARES Act and the internal loan deferral program offered to qualified customers. The Company utilized a two year reasonable and supportable forecast range during the current period. The Company continues its heightened monitoring efforts with respect to loans in certain industries the Company currently believes pose a greater risk in the current environment (i.e., hospitality and healthcare). In addition, the Company will continue to monitor the performance of all portfolios, the severity and duration of the pandemic and potential subsequent recovery of the economic environment.
Although the Company made an accounting policy election to exclude accrued interest from the amortized cost of loans and therefore the allowance calculation, the Company recorded $1,500 in provision for credit losses to establish an allowance for the interest deferred as part of the loan deferral program.
| Provision for Credit Losses on Loans to Average Loans | ||||||||
| 2020 | 2019 | |||||||
| 0.81% | 0.08% | |||||||
The table below reflects the activity in the allowance for credit losses on loans for the years ended December 31:
| 2020 | 2019 | ||||||||||
| Balance at beginning of year | $ | 52,162 | $ | 49,026 | |||||||
| Impact of adoption of ASC 326 | 42,484 | — | |||||||||
| Provision for credit losses on loans | 85,350 | 7,050 | |||||||||
| Charge-offs | |||||||||||
| Commercial, financial, agricultural | 3,577 | 2,681 | |||||||||
| Lease financing | 168 | 278 | |||||||||
| Real estate – construction | 716 | — | |||||||||
| Real estate – 1-4 family mortgage | 1,167 | 1,602 | |||||||||
| Real estate – commercial mortgage | 2,642 | 1,490 | |||||||||
| Installment loans to individuals | 7,835 | 7,427 | |||||||||
| Total charge-offs | 16,105 | 13,478 | |||||||||
| Recoveries | |||||||||||
| Commercial, financial, agricultural | 1,263 | 1,428 | |||||||||
| Lease financing | 11 | 7 | |||||||||
| Real estate – construction | 31 | 21 | |||||||||
| Real estate – 1-4 family mortgage | 838 | 712 | |||||||||
| Real estate – commercial mortgage | 2,478 | 689 | |||||||||
| Installment loans to individuals | 7,632 | 6,707 | |||||||||
| Total recoveries | 12,253 | 9,564 | |||||||||
| Net charge-offs | 3,852 | 3,914 | |||||||||
| Balance at end of year | $ | 176,144 | $ | 52,162 | |||||||
| Net charge-offs to average loans | 0.04 | % | 0.04 | % | |||||||
| Net charge-offs to allowance for credit losses on loans | 2.19 | % | 7.50 | % | |||||||
| Allowance for credit losses on loans to: | |||||||||||
| Total loans | 1.61 | % | 0.54 | % | |||||||
|
Total loans excluding PPP loans
(1)
|
1.80 | % | 0.54 | % | |||||||
| Nonperforming loans | 317.55 | % | 143.61 | % | |||||||
| Nonaccrual loans | 342.56 | % | 182.72 | % | |||||||
(1)
Allowance for credit losses on loans to total loans excluding PPP loans is a non-GAAP financial measure. A reconciliation of this financial measure from GAAP to non-GAAP as well as an explanation of why the Company provides non-GAAP financial measures can be found under the “Non-GAAP Financial Measures” heading at the end of this Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, in this report.
53
The table below reflects net charge-offs to daily average loans outstanding, by loan category, during the period for the years ended December 31:
| 2020 | 2019 | |||||||||||||||||||
| Net Charge-offs | Average Loans | Net Charge-offs to Average Loans | Net Charge-offs | Average Loans | Net Charge-offs to Average Loans | |||||||||||||||
| Commercial, financial, agricultural | $ | 2,314 | $ | 2,242,764 | 0.10% | $ | 1,253 | $ | 1,313,228 | 0.10% | ||||||||||
| Lease financing | 157 | 83,571 | 0.19% | 271 | 63,078 | 0.43% | ||||||||||||||
| Real estate – construction | 685 | 816,311 | 0.08% | (21) | 774,053 | —% | ||||||||||||||
| Real estate – 1-4 family mortgage | 329 | 2,785,018 | 0.01% | 890 | 2,782,614 | 0.03% | ||||||||||||||
| Real estate – commercial mortgage | 164 | 4,388,743 | —% | 801 | 4,038,568 | 0.02% | ||||||||||||||
| Installment loans to individuals | 203 | 277,149 | 0.07% | 720 | 197,014 | 0.37% | ||||||||||||||
| Total | $ | 3,852 | $ | 10,593,556 | 0.04% | $ | 3,914 | $ | 9,168,555 | 0.04% | ||||||||||
The following table provides further details of the Company’s net charge-offs of loans secured by real estate for the years ended December 31:
| 2020 | 2019 | ||||||||||
| Real estate – construction: | |||||||||||
| Residential | $ | 685 | $ | (21) | |||||||
| Commercial | — | — | |||||||||
| Total real estate – construction | 685 | (21) | |||||||||
| Real estate – 1-4 family mortgage: | |||||||||||
| Primary | 883 | 917 | |||||||||
| Home equity | (87) | 121 | |||||||||
| Rental/investment | 27 | 79 | |||||||||
| Land development | (494) | (227) | |||||||||
| Total real estate – 1-4 family mortgage | 329 | 890 | |||||||||
| Real estate – commercial mortgage: | |||||||||||
| Owner-occupied | 1,257 | 474 | |||||||||
| Non-owner occupied | (1,115) | 372 | |||||||||
| Land development | 22 | (45) | |||||||||
| Total real estate – commercial mortgage | 164 | 801 | |||||||||
| Total net charge-offs of loans secured by real estate | $ | 1,178 | $ | 1,670 | |||||||
54
Allowance for Credit Losses on Unfunded Commitments; Provision for Credit Losses on Unfunded Commitments
. The Company maintains a separate allowance for credit losses on unfunded loan commitments, which is included in the “Other liabilities” line item on the Consolidated Balance Sheets. Just as with the allowance for credit losses, the Company began calculating the reserve for unfunded commitments under CECL on January 1, 2020, with the impact of CECL adoption on the reserve described in the table below. Management estimates the amount of expected losses on unfunded loan commitments by calculating a likelihood of funding over the contractual period for exposures that are not unconditionally cancellable by the Company and applying the loss factors used in the allowance for credit loss on loans methodology described above to unfunded commitments for each loan type. No credit loss estimate is reported for off-balance-sheet credit exposures that are unconditionally cancellable by the Company. A roll-forward of the allowance for credit losses on unfunded commitments is shown in the tables below.
| December 31, 2020 | |||||
| Allowance for credit losses on unfunded loan commitments: | |||||
| Beginning balance | $ | 946 | |||
| Impact of the adoption of ASC 326 | 10,389 | ||||
| Provision for credit losses on unfunded loan commitments (included in other noninterest expense) | 9,200 | ||||
| Ending balance | $ | 20,535 | |||
Nonperforming Assets
. Nonperforming assets consist of nonperforming loans and other real estate owned. Nonperforming loans are loans on which the accrual of interest has stopped and loans that are contractually 90 days past due on which interest continues to accrue. Generally, the accrual of interest is discontinued when the full collection of principal or interest is in doubt or when the payment of principal or interest has been contractually 90 days past due, unless the obligation is both well secured and in the process of collection. Management, the problem asset resolution committee and our loan review staff closely monitor loans that are considered to be nonperforming.
Other real estate owned consists of properties acquired through foreclosure or acceptance of a deed in lieu of foreclosure. These properties are carried at the lower of cost or fair market value based on appraised value less estimated selling costs. Losses arising at the time of foreclosure of properties are charged against the allowance for credit losses. Reductions in the carrying value subsequent to acquisition are charged to earnings and are included in “Other real estate owned” in the Consolidated Statements of Income.
55
The following table provides details of the Company’s nonperforming assets that are non purchased and nonperforming assets that have been purchased in one of the Company’s previous acquisitions as of the dates presented.
| Non Purchased | Purchased | Total | |||||||||||||||
| December 31, 2020 | |||||||||||||||||
| Nonaccruing loans | $ | 20,369 | $ | 31,051 | $ | 51,420 | |||||||||||
| Accruing loans past due 90 days or more | 3,783 | 267 | 4,050 | ||||||||||||||
| Total nonperforming loans | 24,152 | 31,318 | 55,470 | ||||||||||||||
| Other real estate owned | 2,045 | 3,927 | 5,972 | ||||||||||||||
| Total nonperforming assets | $ | 26,197 | $ | 35,245 | $ | 61,442 | |||||||||||
| Nonperforming loans to total loans | 0.51 | % | |||||||||||||||
| Nonaccruing loans to total loans | 0.47 | % | |||||||||||||||
| Nonperforming assets to total assets | 0.41 | % | |||||||||||||||
| December 31, 2019 | |||||||||||||||||
| Nonaccruing loans | $ | 21,509 | $ | 7,038 | $ | 28,547 | |||||||||||
| Accruing loans past due 90 days or more | 3,458 | 4,317 | 7,775 | ||||||||||||||
| Total nonperforming loans | 24,967 | 11,355 | 36,322 | ||||||||||||||
| Other real estate owned | 2,762 | 5,248 | 8,010 | ||||||||||||||
| Total nonperforming assets | $ | 27,729 | $ | 16,603 | $ | 44,332 | |||||||||||
| Nonperforming loans to total loans | 0.37 | % | |||||||||||||||
| Nonaccruing loans to total loans | 0.29 | % | |||||||||||||||
| Nonperforming assets to total assets | 0.33 | % | |||||||||||||||
The level of nonperforming loans increased $19,148 from December 31, 2019, while OREO decreased $2,038 during the same period. The implementation of CECL, which requires purchased credit deteriorated loans to be classified as nonaccrual based on performance, contributed $3,338 to the increase in nonaccruing loans.
56
The following table presents nonperforming loans by loan category at December 31 for each of the years presented.
| 2020 | 2019 | ||||||||||
| Commercial, financial, agricultural | $ | 16,668 | $ | 8,458 | |||||||
| Lease financing | 48 | 226 | |||||||||
| Real estate – construction: | |||||||||||
| Residential | 497 | — | |||||||||
| Total real estate – construction | 497 | — | |||||||||
| Real estate – 1-4 family mortgage: | |||||||||||
| Primary | 16,317 | 14,270 | |||||||||
| Home equity | 2,273 | 2,328 | |||||||||
| Rental/investment | 1,526 | 1,958 | |||||||||
| Land development | 345 | 367 | |||||||||
| Total real estate – 1-4 family mortgage | 20,461 | 18,923 | |||||||||
| Real estate – commercial mortgage: | |||||||||||
| Owner-occupied | 6,364 | 4,526 | |||||||||
| Non-owner occupied | 10,204 | 2,459 | |||||||||
| Land development | 572 | 1,109 | |||||||||
| Total real estate – commercial mortgage | 17,140 | 8,094 | |||||||||
| Installment loans to individuals | 656 | 621 | |||||||||
| Total nonperforming loans | $ | 55,470 | $ | 36,322 | |||||||
Although nonperforming loans have increased during the current year, coverage ratios have increased as a result of the increase in the allowance for credit losses discussed above.
Management has evaluated the aforementioned loans and other loans classified as nonperforming and believes that all nonperforming loans have been adequately reserved for in the allowance for credit losses on loans at December 31, 2020. Management also continually monitors past due loans for potential credit quality deterioration. Total loans 30-89 days past due on which interest was still accruing were $26,286 at December 31, 2020 as compared to $37,668 at December 31, 2019.
Although not classified as nonperforming loans, another category of assets that contribute to our credit risk is restructured loans. Restructured loans are those for which concessions have been granted to the borrower due to a deterioration of the borrower’s financial condition and are performing in accordance with the new terms. Such concessions may include reduction in interest rates or deferral of interest or principal payments. In evaluating whether to restructure a loan, management analyzes the long-term financial condition of the borrower, including guarantor and collateral support, to determine whether the proposed concessions will increase the likelihood of repayment of principal and interest. Restructured loans that are not performing in accordance with their restructured terms that are either contractually 90 days past due or placed on nonaccrual status are reported as nonperforming loans.
57
As shown below, restructured loans totaled $20,448 at December 31, 2020 compared to $11,954 at December 31, 2019. At December 31, 2020, loans restructured through interest rate concessions represented 37% of total restructured loans, while loans restructured by a concession in payment terms represented the remainder. The following table provides further details of the Company’s restructured loans at December 31 for each of the years presented:
| 2020 | 2019 | ||||||||||
| Commercial, financial, agricultural | $ | 2,326 | $ | 523 | |||||||
| Real estate – 1-4 family mortgage: | |||||||||||
| Primary | 9,460 | 6,987 | |||||||||
| Home equity | 332 | 213 | |||||||||
| Rental/investment | 432 | 596 | |||||||||
| Total real estate – 1-4 family mortgage | 10,224 | 7,796 | |||||||||
| Real estate – commercial mortgage: | |||||||||||
| Owner-occupied | 6,838 | 3,096 | |||||||||
| Non-owner occupied | 797 | 503 | |||||||||
| Land development | 183 | 36 | |||||||||
| Total real estate – commercial mortgage | 7,818 | 3,635 | |||||||||
| Installment loans to individuals | 80 | — | |||||||||
| Total restructured loans | $ | 20,448 | $ | 11,954 | |||||||
Changes in the Company’s restructured loans are set forth in the table below for the periods presented.
| 2020 | 2019 | ||||||||||
| Balance as of January 1 | $ | 11,954 | $ | 12,820 | |||||||
| Additional loans with concessions | 14,533 | 3,829 | |||||||||
| Reclassified as performing | 428 | 2,183 | |||||||||
| Reductions due to: | |||||||||||
| Reclassified as nonperforming | (3,321) | (2,772) | |||||||||
| Paid in full | (2,387) | (951) | |||||||||
| Charge-offs | (3) | (101) | |||||||||
| Principal paydowns | (756) | (678) | |||||||||
| Measurement period adjustment on recently acquired loans | — | (2,376) | |||||||||
| Balance as of December 31 | $ | 20,448 | $ | 11,954 | |||||||
The following table shows the principal amounts of nonperforming and restructured loans as of December 31 of each year presented. All loans where information exists about possible credit problems that would cause us to have serious doubts about the borrower’s ability to comply with the current repayment terms of the loan have been reflected in the table below.
| 2020 | 2019 | ||||||||||
| Nonaccruing loans | $ | 51,420 | $ | 28,547 | |||||||
| Accruing loans past due 90 days or more | 4,050 | 7,775 | |||||||||
| Total nonperforming loans | 55,470 | 36,322 | |||||||||
| Restructured loans | 20,448 | 11,954 | |||||||||
| Total nonperforming and restructured loans | $ | 75,918 | $ | 48,276 | |||||||
58
The following table provides details of the Company’s other real estate owned as of December 31 for each of the years presented:
| 2020 | 2019 | ||||||||||
| Residential real estate | $ | 179 | $ | 1,305 | |||||||
| Commercial real estate | 2,665 | 3,654 | |||||||||
| Residential land development | 1,013 | 899 | |||||||||
| Commercial land development | 2,115 | 2,152 | |||||||||
| Total other real estate owned | $ | 5,972 | $ | 8,010 | |||||||
Changes in the Company’s other real estate owned were as follows for the periods presented:
| 2020 | 2019 | ||||||||||
| Balance as of January 1 | $ | 8,010 | $ | 11,040 | |||||||
| Transfers of loans | 8,588 | 4,764 | |||||||||
| Impairments | (2,160) | (1,265) | |||||||||
| Dispositions | (8,415) | (6,498) | |||||||||
| Other | (51) | (31) | |||||||||
| Balance as of December 31 | $ | 5,972 | $ | 8,010 | |||||||
We realized net gains of $23 and net losses of $94 on dispositions of other real estate owned during 2020 and 2019, respectively.
Interest Rate Risk
Market risk is the risk of loss from adverse changes in market prices and rates. The majority of assets and liabilities of a financial institution are monetary in nature and therefore differ greatly from most commercial and industrial companies that have significant investments in fixed assets and inventories. Our market risk arises primarily from interest rate risk inherent in lending and deposit-taking activities. Management believes a significant impact on the Company’s financial results stems from our ability to react to changes in interest rates. A sudden and substantial change in interest rates may adversely impact our earnings because the interest rates borne by assets and liabilities do not change at the same speed, to the same extent or on the same basis.
Because of the impact of interest rate fluctuations on our profitability, the Board of Directors and management actively monitor and manage our interest rate risk exposure. We have an Asset/Liability Committee (the “ALCO”) that is authorized by the Board of Directors to monitor our interest rate sensitivity and to make decisions relating to that process. The ALCO’s goal is to structure our asset/liability composition to maximize net interest income while managing interest rate risk so as to minimize the adverse impact of changes in interest rates on net interest income and capital. The ALCO uses an asset/liability model as the primary quantitative tool in measuring the amount of interest rate risk associated with changing market rates. The model is used to perform both net interest income forecast simulations for multiple year horizons and economic value of equity (“EVE”) analyses, each under various interest rate scenarios, which could impact the results presented in the table below.
Net interest income simulations measure the short and medium-term earnings exposure from changes in market interest rates in a rigorous and explicit fashion. Our current financial position is combined with assumptions regarding future business to calculate net interest income under various hypothetical rate scenarios. EVE measures our long-term earnings exposure from changes in market rates of interest. EVE is defined as the present value of assets minus the present value of liabilities at a point in time for a given set of market rate assumptions. An increase in EVE due to a specified rate change indicates an improvement in the long-term earnings capacity of the balance sheet assuming that the rate change remains in effect over the life of the current balance sheet.
59
The following table presents the projected impact of a change in interest rates on (1) static EVE and (2) earnings at risk (that is, net interest income) for the 1-12 and 13-24 month periods commencing January 1, 2021, in each case as compared to the result under rates present in the market on December 31, 2020. The changes in interest rates assume an instantaneous and parallel shift in the yield curve and do not take into account changes in the slope of the yield curve.
| Percentage Change In: | ||||||||||||||||||||
| Immediate Change in Rates of: | Economic Value Equity (EVE) |
Earning at Risk (EAR)
(Net Interest Income) |
||||||||||||||||||
| Static | 1-12 Months | 13-24 Months | ||||||||||||||||||
| +200 | 18.54% | 13.66% | 20.69% | |||||||||||||||||
| +100 | 10.14% | 6.85% | 10.60% | |||||||||||||||||
The rate shock results for the EVE and net interest income simulations for the next 24 months produce an asset sensitive position at December 31, 2020 and are all within the parameters set by the Board of Directors.
The preceding measures assume no change in the size or asset/liability compositions of the balance sheet, and they do not reflect future actions the ALCO may undertake in response to such changes in interest rates.
The scenarios assume instantaneous movements in interest rates in increments of plus 100 and 200 basis points. As interest rates are adjusted over a period of time, it is our strategy to proactively change the volume and mix of our balance sheet in order to mitigate our interest rate risk. The computation of the prospective effects of hypothetical interest rate changes requires numerous assumptions including asset prepayment speeds, the impact of competitive factors on our pricing of loans and deposits, how responsive our deposit repricing is to the change in market rates and the expected life of non-maturity deposits. These business assumptions are based upon our experience, business plans and published industry experience. Such assumptions may not necessarily reflect the manner or timing in which cash flows, asset yields and liability costs respond to changes in market rates. Because these assumptions are inherently uncertain, actual results will differ from simulated results.
The Company utilizes derivative financial instruments, including interest rate contracts such as swaps, caps and/or floors, forward commitments, and interest rate lock commitments, as part of its ongoing efforts to mitigate its interest rate risk exposure. For more information about the Company’s derivative financial instruments, see the “Off-Balance Sheet Transactions” section below and Note 14, “Derivative Instruments,” in the Notes to Consolidated Financial Statements in Item 8, Financial Statements and Supplementary Data, in this report.
Liquidity and Capital Resources
Liquidity management is the ability to meet the cash flow requirements of customers who may be either depositors wishing to withdraw funds or borrowers needing assurance that sufficient funds will be available to meet their credit needs.
Core deposits, which are deposits excluding time deposits greater than $250,000, are the major source of funds used by the Bank to meet cash flow needs. Maintaining the ability to acquire these funds as needed in a variety of markets is the key to assuring the Bank’s liquidity. Management continually monitors the Bank’s liquidity and non-core dependency ratios to ensure compliance with targets established by the Asset/Liability Management Committee.
Our investment portfolio is another alternative for meeting liquidity needs. These assets generally have readily available markets that offer conversions to cash as needed. Within the next twelve months the securities portfolio is forecasted to generate cash flow through principal payments and maturities equal to 23.82% of the carrying value of the total securities portfolio. Securities within our investment portfolio are also used to secure certain deposit types and short-term borrowings. At December 31, 2020, securities with a carrying value of $614,610 were pledged to secure government, public, trust, and other deposits and as collateral for short-term borrowings and derivative instruments as compared to $444,603 at December 31, 2019.
Other sources available for meeting liquidity needs include federal funds purchased, security repurchase agreements and short-term and long-term advances from the FHLB. Interest is charged at the prevailing market rate on these borrowings. Federal funds are short term borrowings, generally overnight borrowings, between financial institutions, while security repurchase agreements represent funds received from customers, generally on an overnight or continuous basis, which are collateralized by investment securities owned or, at times, borrowed and re-hypothecated by the Company. There were $10,393 in federal funds purchased outstanding at December 31, 2020, while none were outstanding at December 31, 2019. Security repurchase agreements were $10,947 at December 31, 2020, as compared to $9,091 at December 31, 2019. The Company had no short-term borrowings from the FHLB (i.e., advances with original maturities less than one year) at December 31, 2020, as compared to $480,000 at December 31, 2019. Long-term FHLB borrowings are used to match-fund fixed rate loans in order to minimize interest rate risk and also are used to meet day-to-day liquidity needs, particularly when the cost of such borrowings compares favorably to the rates that we would be required to pay to attract deposits. At December 31, 2020, the balance of our
60
outstanding long-term advances with the FHLB was $152,167 as compared to $152,337 at December 31, 2019. The total amount of the remaining credit available to us from the FHLB at December 31, 2020 was $3,784,520. We also maintain lines of credit with other commercial banks totaling $180,000. These are unsecured, uncommitted lines of credit maturing at various times within the next twelve months. There were no amounts outstanding under these lines of credit at December 31, 2020 or 2019.
In 2016 and 2020, we accessed the capital markets to generate liquidity in the form of subordinated notes. Additionally, as part of previous acquisitions in 2017, the Company assumed other subordinated notes. For more information about our 2020 offering of subordinated notes and the details of our other subordinated notes, see Note 12, “Long-Term Debt” in the Notes to Consolidated Financial Statements in Item 8, Financial Statements and Supplementary Data, in this report.
Our strategy in choosing funds is focused on minimizing cost in the context of our balance sheet composition and interest rate risk position. Accordingly, management targets growth of non-interest bearing deposits. While we do not control the types of deposit instruments our clients choose, we do influence those choices with the rates and the deposit specials we offer. We constantly monitor our funds position and evaluate the effect that various funding sources have on our financial position. The following table presents, by type, the Company’s funding sources, which consist of total average deposits and borrowed funds, and the total cost of each funding source for each of the years presented:
| Percentage of Total | Cost of Funds | ||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
| Noninterest-bearing demand | 27.91 | % | 23.26 | % | — | % | — | % | |||||||||||||||
| Interest-bearing demand | 43.43 | 44.89 | 0.45 | 0.86 | |||||||||||||||||||
| Savings | 6.29 | 6.11 | 0.10 | 0.19 | |||||||||||||||||||
| Time deposits | 16.07 | 21.91 | 1.50 | 1.71 | |||||||||||||||||||
| Short-term borrowings | 2.94 | 1.17 | 1.07 | 2.43 | |||||||||||||||||||
| Long-term Federal Home Loan Bank advances | 1.25 | 0.35 | 0.61 | 1.51 | |||||||||||||||||||
| Subordinated notes | 1.20 | 1.27 | 5.28 | 6.24 | |||||||||||||||||||
| Other long-term borrowings | 0.91 | 1.04 | 4.40 | 4.48 | |||||||||||||||||||
| Total deposits and borrowed funds | 100.00 | % | 100.00 | % | 0.59 | % | 0.93 | % | |||||||||||||||
Cash and cash equivalents were $633,203 at December 31, 2020, compared to $414,930 at December 31, 2019. Cash used in investing activities for the year ended December 31, 2020 was $1,265,548 compared to $505,910 in 2019. Proceeds from the sale, maturity or call of securities within our investment portfolio were $482,887 for 2020 compared to $474,772 for 2019. These proceeds from the investment portfolio were primarily reinvested back into the securities portfolio. Purchases of investment securities were $515,657 for 2020 compared to $492,018 for 2019.
Cash provided by financing activities for the year ended December 31, 2020 was $1,401,579 compared to $188,106 for the year ended December 31, 2019. Overall deposits increased $1,846,059 for the year ended December 31, 2020 compared to an increase of $85,925 for the same period in 2019.
Restrictions on Bank Dividends, Loans and Advances
The Company’s liquidity and capital resources, as well as its ability to pay dividends to our shareholders, are substantially dependent on the ability of the Bank to transfer funds to the Company in the form of dividends, loans and advances. Under Mississippi law, a Mississippi bank may not pay dividends unless its earned surplus is in excess of three times capital stock. A Mississippi bank with earned surplus in excess of three times capital stock may pay a dividend, subject to the approval of the DBCF. In addition, the FDIC has the authority to prohibit the Bank from engaging in business practices that the FDIC considers to be unsafe or unsound, which, depending on the financial condition of the Bank, could include the payment of dividends. Accordingly, the approval of the DBCF is required prior to the Bank paying dividends to the Company, and under certain circumstances the approval of the FDIC may be required.
In addition to the FDIC and DBCF restrictions on dividends payable by the Bank to the Company, in July 2020 the Federal Reserve provided guidance regarding the criteria that it will use to evaluate the request by a bank holding company to pay dividends in an aggregate amount that will exceed the company’s earnings for the period in which the dividends will be paid. For purposes of this analysis, “dividend” includes not only dividends on preferred and common equity but also dividends on debt underlying trust preferred securities and other Tier 1 capital instruments. The Federal Reserve’s criteria evaluates whether the holding company (1) has net income over the past four quarters sufficient to fully fund the proposed dividend (taking into account prior dividends paid during this period), (2) is considering stock repurchases or redemptions in the quarter, (3) does not
61
have a concentration in commercial real estate and (4) is in good supervisory condition, based on its overall condition and its asset quality risk. A holding company not meeting these criteria will require more in-depth consultations with the Federal Reserve. The Company’s dividends for the fourth quarter of 2020 did not exceed the Company’s earnings for such quarter.
Federal Reserve regulations also limit the amount the Bank may loan to the Company unless such loans are collateralized by specific obligations. At December 31, 2020, the maximum amount available for transfer from the Bank to the Company in the form of loans was $150,478. The Company maintains a line of credit collateralized by cash with the Bank totaling $3,070. There were no amounts outstanding under this line of credit at December 31, 2020. These restrictions did not have any impact on the Company’s ability to meet its cash obligations in 2020, nor does management expect such restrictions to materially impact the Company’s ability to meet its currently-anticipated cash obligations.
Off-Balance Sheet Transactions
The Company enters into loan commitments, standby letters of credit and derivative financial instruments in the normal course of its business. Loan commitments are made to accommodate the financial needs of the Company’s customers. Standby letters of credit commit the Company to make payments on behalf of customers when certain specified future events occur. Both arrangements have credit risk essentially the same as that involved in extending loans to customers and are subject to the Company’s normal credit policies. Collateral (e.g., securities, receivables, inventory, equipment, etc.) is obtained based on management’s credit assessment of the customer.
Loan commitments and standby letters of credit do not necessarily represent future cash requirements of the Company. While the borrower has the ability to draw upon these commitments at any time (assuming the borrower’s compliance with the terms of the loan commitment), these commitments often expire without being drawn upon. The Company’s unfunded loan commitments and standby letters of credit outstanding at December 31, 2020 and 2019 were as follows:
| 2020 | 2019 | ||||||||||
| Loan commitments | $ | 2,749,988 | $ | 2,324,262 | |||||||
| Standby letters of credit | 90,597 | 94,824 | |||||||||
The Company closely monitors the amount of remaining future commitments to borrowers in light of prevailing economic conditions and adjusts these commitments as necessary. The Company will continue this process as new commitments are entered into or existing commitments are renewed.
The Company utilizes derivative financial instruments, including interest rate contracts such as swaps, caps and/or floors, as part of its ongoing efforts to mitigate its interest rate risk exposure and to facilitate the needs of its customers. The Company enters into derivative instruments that are not designated as hedging instruments to help its commercial customers manage their exposure to interest rate fluctuations. To mitigate the interest rate risk associated with these customer contracts, the Company enters into an offsetting derivative contract position with other financial institutions. The Company manages its credit risk, or potential risk of default by its commercial customers, through credit limit approval and monitoring procedures. At December 31, 2020, the Company had notional amounts of $222,933 on interest rate contracts with corporate customers and $222,933 in offsetting interest rate contracts with other financial institutions to mitigate the Company’s rate exposure on its corporate customers’ contracts.
Additionally, the Company enters into interest rate lock commitments with its customers to mitigate the interest rate risk associated with the commitments to fund fixed-rate residential mortgage loans and also enters into forward commitments to sell residential mortgage loans to secondary market investors.
The Company also enters into forward interest rate swap contracts on its FHLB borrowings and its junior subordinated debentures that are accounted for as cash flow hedges. Under each of these contracts, the Company pays a fixed rate of interest and receives a variable rate of interest based on the three-month or one-month LIBOR plus a predetermined spread. The Company entered into an interest rate swap contract on its subordinated notes that is accounted for as a fair value hedge. Under this contract, the Company pays a variable rate of interest based on the three-month LIBOR plus a predetermined spread and receives a fixed rate of interest.
For more information about the Company’s off-balance sheet transactions, see Note 14, “Derivative Instruments” and Note 20, “Commitments, Contingent Liabilities and Financial Instruments with Off-Balance Sheet Risk,” in the Notes to Consolidated Financial Statements in Item 8, Financial Statements and Supplementary Data, in this report.
62
Contractual Obligations
The following table presents, as of December 31, 2020, significant fixed and determinable contractual obligations to third parties by payment date. The Note Reference below refers to the applicable footnote in the Notes to Consolidated Financial Statements in Item 8, Financial Statements and Supplementary Data, in this report.
| Payments Due In: | |||||||||||||||||||||||||||||||||||
|
Note
Reference |
Less Than
One Year |
One to
Three Years |
Three to
Five Years |
Over Five
Years |
Total | ||||||||||||||||||||||||||||||
|
Lease liabilities
(1)
|
25 | $ | 8,607 | $ | 15,516 | $ | 12,646 | $ | 54,106 | $ | 90,875 | ||||||||||||||||||||||||
|
Deposits without a stated maturity
(2)
|
10 | 10,363,193 | — | — | — | 10,363,193 | |||||||||||||||||||||||||||||
|
Time deposits
(2)
|
10 | 1,228,457 | 415,997 | 45,008 | 6,426 | 1,695,888 | |||||||||||||||||||||||||||||
| Short-term borrowings | 11 | 21,340 | — | — | — | 21,340 | |||||||||||||||||||||||||||||
| Federal Home Loan Bank advances | 12 | 100 | 451 | — | 151,616 | 152,167 | |||||||||||||||||||||||||||||
| Junior subordinated debentures | 12 | — | — | — | 110,794 | 110,794 | |||||||||||||||||||||||||||||
| Subordinated notes | 12 | — | — | — | 212,009 | 212,009 | |||||||||||||||||||||||||||||
| Total contractual obligations | $ | 11,621,697 | $ | 431,964 | $ | 57,654 | $ | 534,951 | $ | 12,646,266 | |||||||||||||||||||||||||
(1)
Represents the undiscounted cash flows.
(2)
Excludes interest.
Shareholders’ Equity and Regulatory Matters
Total shareholders’ equity of the Company was $2,132,733 and $2,125,689 at December 31, 2020 and 2019, respectively. Book value per share was $37.95 and $37.39 at December 31, 2020 and 2019, respectively. The growth in shareholders’ equity year over year is attributable to increases in accumulated other comprehensive income, offset by the day one impact of our adoption of CECL, an increased provision for credit losses during the year offsetting a portion of our earnings in 2020 while maintaining dividends and the repurchasing of common stock through the stock repurchase program during the first quarter of 2020.
The Company maintains a shelf registration statement with the SEC. The shelf registration statement, which was effective upon filing, allows the Company to raise capital from time to time through the sale of common stock, preferred stock, debt securities, warrants and units, or a combination thereof, subject to market conditions. Specific terms and prices will be determined at the time of any offering under a separate prospectus supplement that the Company will be required to file with the SEC at the time of the specific offering. The proceeds of the sale of securities, if and when offered, will be used for general corporate purposes as described in any prospectus supplement and could include the expansion of the Company’s banking, insurance and wealth management operations as well as other business opportunities.
In October 2020, the Company’s Board of Directors approved a stock repurchase program, authorizing the Company to repurchase up to $50,000 of its outstanding common stock, either in open market purchases or privately-negotiated transactions. The program will remain in effect until the earlier of October 2021 or the repurchase of the entire amount of common stock authorized to be repurchased by the Board of Directors.
The Company has junior subordinated debentures with a carrying value of $110,794 at December 31, 2020, of which $107,203 are included in the Company’s Tier 1 capital. Federal Reserve guidelines limit the amount of securities that, similar to our junior subordinated debentures, are includable in Tier 1 capital, but these guidelines did not impact the amount of debentures we include in Tier 1 capital. Although our existing junior subordinated debentures are currently unaffected by these Federal Reserve guidelines, on account of changes enacted as part of the Dodd-Frank Act, any new trust preferred securities are not includable in Tier 1 capital. Further, if as a result of an acquisition we exceed $15,000,000 in assets, or if we make any acquisition after we have exceeded $15,000,000 in assets, we will lose Tier 1 treatment of our junior subordinated debentures.
The Company has subordinated notes with a carrying value of $212,009 at December 31, 2020, of which $212,106 are included in the Company’s Tier 2 capital. As previously discussed in the “Financial Condition” section above, in September 2020, the Company issued $100,000 of its 4.50% fixed-to-floating rate subordinated notes due September 1, 2035.
63
The Federal Reserve, the FDIC and the Office of the Comptroller of the Currency have issued guidelines governing the levels of capital that bank holding companies and banks must maintain. Those guidelines specify capital tiers, which include the following classifications:
| Capital Tiers |
Tier 1 Capital to
Average Assets (Leverage) |
Common Equity Tier 1 to
Risk - Weighted Assets |
Tier 1 Capital to
Risk - Weighted Assets |
Total Capital to
Risk - Weighted Assets |
|||||||||||||||||||
| Well capitalized | 5% or above | 6.5% or above | 8% or above | 10% or above | |||||||||||||||||||
| Adequately capitalized | 4% or above | 4.5% or above | 6% or above | 8% or above | |||||||||||||||||||
| Undercapitalized | Less than 4% | Less than 4.5% | Less than 6% | Less than 8% | |||||||||||||||||||
| Significantly undercapitalized | Less than 3% | Less than 3% | Less than 4% | Less than 6% | |||||||||||||||||||
| Critically undercapitalized | Tangible Equity / Total Assets less than 2% | ||||||||||||||||||||||
The following table includes the capital ratios and capital amounts for the Company and the Bank for the years presented:
| Actual |
Minimum Capital
Requirement to be Well Capitalized |
Minimum Capital
Requirement to be Adequately Capitalized (including the phase-in of the Capital Conservation Buffer) |
|||||||||||||||||||||||||||||||||
| Amount | Ratio | Amount | Ratio | Amount | Ratio | ||||||||||||||||||||||||||||||
| December 31, 2020 | |||||||||||||||||||||||||||||||||||
| Renasant Corporation: | |||||||||||||||||||||||||||||||||||
| Tier 1 leverage ratio | $ | 1,306,597 | 9.37 | % | $ | 697,579 | 5.00 | % | $ | 558,063 | 4.00 | % | |||||||||||||||||||||||
| Common equity tier 1 capital ratio | 1,199,394 | 10.93 | % | 713,086 | 6.50 | % | 767,939 | 7.00 | % | ||||||||||||||||||||||||||
| Tier 1 risk-based capital ratio | 1,306,597 | 11.91 | % | 877,644 | 8.00 | % | 932,497 | 8.50 | % | ||||||||||||||||||||||||||
| Total risk-based capital ratio | 1,653,694 | 15.07 | % | 1,097,055 | 10.00 | % | 1,151,908 | 10.50 | % | ||||||||||||||||||||||||||
| Renasant Bank: | |||||||||||||||||||||||||||||||||||
| Tier 1 leverage ratio | $ | 1,369,994 | 9.83 | % | $ | 696,738 | 5.00 | % | $ | 557,391 | 4.00 | % | |||||||||||||||||||||||
| Common equity tier 1 capital ratio | 1,369,994 | 12.49 | % | 712,709 | 6.50 | % | 767,533 | 7.00 | % | ||||||||||||||||||||||||||
| Tier 1 risk-based capital ratio | 1,369,994 | 12.49 | % | 877,181 | 8.00 | % | 932,004 | 8.50 | % | ||||||||||||||||||||||||||
| Total risk-based capital ratio | 1,504,985 | 13.73 | % | 1,096,476 | 10.00 | % | 151,299 | 10.50 | % | ||||||||||||||||||||||||||
| December 31, 2019 | |||||||||||||||||||||||||||||||||||
| Renasant Corporation: | |||||||||||||||||||||||||||||||||||
| Tier 1 leverage ratio | $ | 1,262,588 | 10.37 | % | $ | 608,668 | 5.00 | % | $ | 486,934 | 4.00 | % | |||||||||||||||||||||||
| Common equity tier 1 capital ratio | 1,156,828 | 11.12 | % | 676,106 | 6.50 | % | 728,114 | 7.00 | % | ||||||||||||||||||||||||||
| Tier 1 risk-based capital ratio | 1,262,588 | 12.14 | % | 832,131 | 8.00 | % | 884,139 | 8.50 | % | ||||||||||||||||||||||||||
| Total risk-based capital ratio | 1,432,949 | 13.78 | % | 1,040,163 | 10.00 | % | 1,092,171 | 10.50 | % | ||||||||||||||||||||||||||
| Renasant Bank: | |||||||||||||||||||||||||||||||||||
| Tier 1 leverage ratio | $ | 1,331,809 | 10.95 | % | $ | 607,907 | 5.00 | % | $ | 486,326 | 4.00 | % | |||||||||||||||||||||||
| Common equity tier 1 capital ratio | 1,331,809 | 12.81 | % | 675,581 | 6.50 | % | 727,548 | 7.00 | % | ||||||||||||||||||||||||||
| Tier 1 risk-based capital ratio | 1,331,809 | 12.81 | % | 831,484 | 8.00 | % | 883,452 | 8.50 | % | ||||||||||||||||||||||||||
| Total risk-based capital ratio | 1,388,553 | 13.36 | % | 1,039,355 | 10.00 | % | 1,091,323 | 10.50 | % | ||||||||||||||||||||||||||
As previously disclosed, the Company adopted CECL as of January 1, 2020. The Company has elected to take advantage of transitional relief offered by the Federal Reserve and FDIC to delay for two years the estimated impact of CECL on regulatory capital, followed by a three-year transitional period to phase out the capital benefit provided by the two-year delay.
For a detailed discussion of the capital adequacy guidelines applicable to the Company and the Bank, please refer to the information under the heading “Capital Adequacy Guidelines” in the “Supervision and Regulation-Supervision and Regulation
64
of Renasant Corporation” section and the “Supervision and Regulation-Supervision and Regulation of Renasant Bank” section in Item 1, Business, in this report.
65
Non-GAAP Financial Measures
In addition to results presented in accordance with generally accepted accounting principles in the United States of America (“GAAP”), this document contains certain non-GAAP financial measures, namely, return on average tangible shareholders’ equity, return on average tangible assets, the ratio of tangible equity to tangible assets, the allowance for credit losses on loans to total loans, excluding PPP loans (the “adjusted allowance ratio”) and an adjusted efficiency ratio. Other than the adjusted allowance ratio (which only excludes PPP loans), these non-GAAP financial measures adjust GAAP financial measures to exclude intangible assets and certain charges (such as, when applicable, COVID-19 related expenses, merger and conversion expenses, debt prepayment penalties, restructuring charges, swap termination charges and asset valuation adjustments) with respect to which the Company is unable to accurately predict when these charges will be incurred or, when incurred, the amount thereof. With respect to COVID-19 related expenses in particular, management added these expenses as a charge to exclude when calculating non-GAAP financial measures because the expenses included within this line item are readily quantifiable and possess the same characteristics with respect to management’s inability to accurately predict the timing or amount thereof as the other charges excluded when calculating non-GAAP financial measures. Management uses these non-GAAP financial measures (other than the adjusted allowance ratio) when evaluating capital utilization and adequacy, while it uses the adjusted allowance ratio to determine the adequacy of our allowance with respect to loans not fully guaranteed by the SBA. In addition, the Company believes that these non-GAAP financial measures facilitate the making of period-to-period comparisons and are meaningful indicators of its operating performance, particularly because these measures are widely used by industry analysts for companies with merger and acquisition activities. Also, because intangible assets such as goodwill and the core deposit intangible and charges such as merger and conversion expenses, restructuring charges and COVID-19 related expenses can vary extensively from company to company and, as to intangible assets, are excluded from the calculation of a financial institution’s regulatory capital, the Company believes that the presentation of this non-GAAP financial information allows readers to more easily compare the Company’s results to information provided in other regulatory reports and the results of other companies. The reconciliations from GAAP to non-GAAP for these financial measures are below.
| Return on average tangible shareholders' equity and Return on average tangible assets | ||||||||||||||||||||
| 2020 | 2019 | 2018 | ||||||||||||||||||
| Net income (GAAP) | $ | 83,651 | $ | 167,596 | $ | 146,920 | ||||||||||||||
| Amortization of intangibles | 7,121 | 8,105 | 7,179 | |||||||||||||||||
|
Tax effect of adjustment noted above
(1)
|
(1,382) | (1,807) | (1,588) | |||||||||||||||||
| Tangible net income (non-GAAP) | $ | 89,390 | $ | 173,894 | $ | 152,511 | ||||||||||||||
| Average shareholders' equity (GAAP) | $ | 2,114,590 | $ | 2,107,832 | $ | 1,701,334 | ||||||||||||||
| Intangibles | 973,287 | 976,065 | 747,008 | |||||||||||||||||
| Average tangible shareholders' equity (non-GAAP) | $ | 1,141,303 | $ | 1,131,767 | $ | 954,326 | ||||||||||||||
| Average total assets (GAAP) | $ | 14,503,449 | $ | 12,875,986 | $ | 11,104,567 | ||||||||||||||
| Intangibles | 973,287 | 976,065 | 747,008 | |||||||||||||||||
| Average tangible assets (non-GAAP) | $ | 13,530,162 | $ | 11,899,921 | $ | 10,357,559 | ||||||||||||||
| Return on (average) shareholders' equity (GAAP) | 3.96 | % | 7.95 | % | 8.64 | % | ||||||||||||||
| Effect of adjustment for intangible assets | 3.87 | % | 7.41 | % | 7.34 | % | ||||||||||||||
| Return on average tangible shareholders' equity (non-GAAP) | 7.83 | % | 15.36 | % | 15.98 | % | ||||||||||||||
| Return on (average) assets (GAAP) | 0.58 | % | 1.30 | % | 1.32 | % | ||||||||||||||
| Effect of adjustment for intangible assets | 0.08 | % | 0.16 | % | 0.15 | % | ||||||||||||||
| Return on average tangible assets (non-GAAP) | 0.66 | % | 1.46 | % | 1.47 | % | ||||||||||||||
(1) Tax effect is calculated based on the respective periods’ effective tax rate.
66
| Tangible common equity ratio (Tangible shareholders' equity to tangible assets) | |||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||
| Actual shareholders' equity (GAAP) | $ | 2,132,733 | $ | 2,125,689 | $ | 2,043,913 | |||||||||||
| Intangibles | 969,823 | 976,943 | 977,793 | ||||||||||||||
| Actual tangible shareholders' equity (non-GAAP) | $ | 1,162,910 | $ | 1,148,746 | $ | 1,066,120 | |||||||||||
| Actual total assets (GAAP) | $ | 14,929,612 | $ | 13,400,618 | $ | 12,934,878 | |||||||||||
| Intangibles | 969,823 | 976,943 | 977,793 | ||||||||||||||
| Actual tangible assets (non-GAAP) | $ | 13,959,789 | $ | 12,423,675 | $ | 11,957,085 | |||||||||||
| Tangible Common Equity Ratio | |||||||||||||||||
| Shareholders' equity to actual assets (GAAP) | 14.29 | % | 15.86 | % | 15.80 | % | |||||||||||
| Effect of adjustment for intangible assets | 5.96 | % | 6.61 | % | 6.88 | % | |||||||||||
| Tangible shareholders' equity to tangible assets (non-GAAP) | 8.33 | % | 9.25 | % | 8.92 | % | |||||||||||
| Adjusted Efficiency Ratio | ||||||||||||||
| 2020 | 2019 | |||||||||||||
| Interest income (fully tax equivalent basis) | $ | 505,017 | $ | 548,909 | ||||||||||
| Interest expense | 71,335 | 98,923 | ||||||||||||
| Net interest income (fully tax equivalent basis) | $ | 433,682 | $ | 449,986 | ||||||||||
| Total noninterest income | $ | 235,532 | $ | 153,254 | ||||||||||
| Net gains on sales of securities | 46 | 348 | ||||||||||||
| MSR valuation adjustment | (11,726) | (1,836) | ||||||||||||
| Adjusted noninterest income | $ | 247,212 | $ | 154,742 | ||||||||||
| Total noninterest expense | $ | 471,988 | $ | 374,174 | ||||||||||
| Intangible amortization | 7,121 | 8,105 | ||||||||||||
| Merger and conversion related expenses | — | 279 | ||||||||||||
| Debt prepayment penalty | 121 | 54 | ||||||||||||
| Restructuring charges | 7,365 | — | ||||||||||||
| Swap termination charges | 2,040 | — | ||||||||||||
| COVID-19 related expenses | 10,343 | — | ||||||||||||
| Provision for unfunded commitments | 9,200 | — | ||||||||||||
| Adjusted noninterest expense | $ | 435,798 | $ | 365,736 | ||||||||||
| Efficiency Ratio (GAAP) | 70.53 | % | 62.03 | % | ||||||||||
| Adjusted Efficiency Ratio (non-GAAP) | 64.00 | % | 60.48 | % | ||||||||||
67
| Allowance for Credit Losses on Loans to Total Loans, excluding PPP Loans | ||||||||
| 2020 | ||||||||
| Total loans (GAAP) | $ | 10,933,647 | ||||||
| Less PPP loans | 1,128,703 | |||||||
| Adjusted total loans (non-GAAP) | $ | 9,804,944 | ||||||
| Allowance for Credit Losses on Loans | $ | 176,144 | ||||||
| ACL/Total loans (GAAP) | 1.61 | % | ||||||
| ACL/Total loans excluding PPP loans (non-GAAP) | 1.80 | % | ||||||
None of the non-GAAP financial measures the Company has included in this document is intended to be considered in isolation or as a substitute for any measure prepared in accordance with GAAP. Readers of this Form 10-K should note that, because there are no standard definitions for how to calculate the non-GAAP financial measures that we use as well as the results, the Company's calculations may not be comparable to similarly titled measures presented by other companies. Also, there may be limits in the usefulness of these measures to readers of this document. As a result, the Company encourages readers to consider its consolidated financial statements and footnotes thereto in their entirety and not to rely on any single financial measure.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Please refer to the discussion found under the headings “Risk Management – Interest Rate Risk” and “Liquidity and Capital Resources” in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, in this report for the disclosures required pursuant to this Item 7A.
SEC Form 10-K
A COPY OF THIS ANNUAL REPORT ON FORM 10-K, AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION, MAY BE OBTAINED WITHOUT CHARGE BY DIRECTING A WRITTEN REQUEST TO: JOHN S. OXFORD, SENIOR VICE PRESIDENT AND DIRECTOR OF MARKETING AND PUBLIC RELATIONS, RENASANT BANK, 209 TROY STREET, TUPELO, MISSISSIPPI, 38804-4827.
68
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements of the Company meeting the requirements of Regulation S-X are included on the succeeding pages of this Item. All schedules have been omitted because they are not required or are not applicable.
RENASANT CORPORATION AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2020, 2019 and 2018
CONTENTS
| Page | |||||
69
Report on Management’s Assessment of Internal Control over Financial Reporting
Renasant Corporation (the “Company”) is responsible for the preparation, integrity and fair presentation of the consolidated financial statements included in this annual report. The consolidated financial statements and notes included in this annual report have been prepared in conformity with accounting principles generally accepted in the United States and necessarily include some amounts that are based on management’s best estimates and judgments.
Management of the Company is responsible for establishing and maintaining effective internal control over financial reporting designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States. The Company’s internal control over financial reporting includes those policies and procedures that: (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (3) provide reasonable assurance regarding prevention or timely detection of any unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.
The system of internal control over financial reporting as it relates to the financial statements is evaluated for effectiveness by management and tested for reliability through a program of internal audits. Actions are taken to correct potential deficiencies as they are identified. Any system of internal control, no matter how well designed, has inherent limitations, including the possibility that a control can be circumvented or overridden, and misstatements due to error or fraud may occur and not be detected. Also, because of changes in conditions, internal control effectiveness may vary over time. Accordingly, even an effective system of internal control will provide only reasonable assurance with respect to financial statement preparation.
Management, with the participation of the Company’s principal executive officer and principal financial officer, conducted an assessment of the effectiveness of the Company’s system of internal control over financial reporting as of December 31, 2020, based on criteria for effective internal control over financial reporting described in the “Internal Control - Integrated Framework,” (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, management has concluded that, as of December 31, 2020, the Company’s system of internal control over financial reporting is effective and meets the criteria of the “Internal Control – Integrated Framework.” HORNE LLP, the Company’s independent registered public accounting firm that has audited the Company’s financial statements included in this annual report, has issued an attestation report on the Company’s internal control over financial reporting which is included herein.
|
|
|||||||
| C. Mitchell Waycaster | James C. Mabry IV | |||||||
| President and | Executive Vice President and | |||||||
| Chief Executive Officer | Chief Financial Officer | |||||||
| February 26, 2021 | ||||||||
70
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors of Renasant Corporation
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Renasant Corporation (the “Company”) as of December 31, 2020 and 2019, the related consolidated statements of income, comprehensive income, changes in shareholders’ equity, and cash flows, for each of the three years in the period ended December 31, 2020, and the related notes to the consolidated financial statements (collectively, referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (the “PCAOB”), the Company’s internal control over financial reporting as of December 31, 2020, based on criteria established in the
Internal Control - Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013, and our report dated February 26, 2021, expressed an unqualified opinion on the effectiveness of the Company's internal control over financial reporting.
Adoption of New Accounting Standard
As discussed in Note 1 to the consolidated financial statements, the Company has changed its method of accounting for credit losses effective January 1, 2020 due to the adoption of Accounting Standards Codification ASC 326: Financial Instruments – Credit Losses (“ASC 326”). The Company adopted the new credit loss standard using the modified retrospective approach such that prior period amounts are not adjusted and continue to be reported in accordance with previously applicable generally accepted accounting principles. As explained below, auditing the Company’s allowance for credit losses, including adoption of the new accounting guidance related to the estimate of allowance for credit losses, was a critical audit matter.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinions on the critical audit matter or on the accounts or disclosures to which it relates.
Allowance for Credit Losses - Loans
Description of the Matter
As described in Notes 1 and 5 to the financial statements, the Company’s allowance for credit losses (“ACL”) is a valuation allowance that reflects the Company’s best estimate of expected credit losses inherent within the Company’s loans held for
71
investment portfolio and is maintained at a level believed adequate by management to absorb credit losses inherent in the entire loan portfolio in accordance with ASC 326. The ACL is measured over the contractual life of loans held for investment and for off-balance sheet commitments and is estimated using relevant available information relating to past events, current conditions, and reasonable and supportable forecasts, as well as qualitative adjustments. The Company’s adoption of ASC 326 effective January 1, 2020 resulted in a pre-tax cumulative effective transition adjustment increasing the ACL by $42,484,000 and the reserve for unfunded commitments by $10,389,000. The ACL was $176,144,000 at December 31, 2020, which consisted of 1) $161,954,000 of loss allocations on pools of loans that share similar risk characteristics (“collectively evaluated loans”) and 2) $14,190,000 of loss allocations on individual loans that do not share risk characteristics with other loans and the measurement of expected credit losses for such individual loans (“individually evaluated loans”). The reserve for unfunded commitments was $20,535,000 at December 31, 2020.
The Company’s measurement of expected credit losses of loans on a pool basis when the loans share similar risk characteristics is based off of historical data that is adjusted, as necessary, for both internal and external qualitative factors where there are differences in the historical loss data of the Company and current or projected future conditions. Consideration of the relevant qualitative factors are used to bring the ACL to the level management believes is appropriate based on factors that are otherwise unaccounted for in the quantitative process. The ACL also includes reserves for loans evaluated on an individual basis, such as certain loans graded substandard or on nonaccrual. Management applies judgment in the determination of the qualitative factors and reserves assigned on an individual basis to estimate the ACL.
The ACL was identified by us as a critical audit matter because of the extent of auditor judgment applied and significant audit effort to evaluate the significant subjective and complex judgments made by management throughout the initial adoption and subsequent application processes, including the judgment required in evaluating management’s determination of the qualitative factors and the reserve assumptions for loans evaluated on an individual basis.
How We Addressed the Matter in Our Audit
The primary audit procedures we performed in response to this critical audit matter included:
a.
Obtained an understanding of the Company’s process for establishing the ACL, including determination of the qualitative factors and reserve assumptions for loans evaluated on an individual basis, and evaluated the process utilized by management to challenge the model results and determine the best estimate of the ACL at the date of adoption and as of the balance sheet date.
b.
Evaluated the design and tested the operating effectiveness of the controls associated with the ACL process, including controls around the reliability and accuracy of data used in the model, management’s review and approval of the selected qualitative factors, the reserve assumptions for loans evaluated on an individual basis, the governance of the credit loss methodology, and management’s review and approval of the ACL.
c.
Assessed reasonableness of model methodology and key modeling assumptions, as well as the appropriateness of management’s qualitative framework, and reserve assumptions for loans evaluated on an individual basis.
d.
Performed specific substantive tests of the models utilized, qualitative factors and the reserve assumptions for loans evaluated on an individual basis. We evaluated if qualitative factors were applied based on a comprehensive framework and compared the adjustments utilized by management to both internal portfolio metrics and external macroeconomic data (as applicable) to support adjustments and evaluate trends in such adjustments. Within our reserve testing for loans evaluated on an individual basis, we evaluated management’s assumptions, including collateral valuations. In addition, we evaluated the Company’s estimate of the overall ACL giving consideration to the Company’s borrowers, loan portfolio, and macroeconomic trends, independently obtained and compared such information to comparable financial institutions and considered whether new or contrary information existed.
| /s/ HORNE LLP | ||
| We have served as the Company’s auditor since 2005. | ||
| Memphis, Tennessee | ||
| February 26, 2021 | ||
72
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors of Renasant Corporation:
Opinion on the Internal Control Over Financial Reporting
We have audited Renasant Corporation’s (the “Company”) internal control over financial reporting as of December 31, 2020, based on criteria established in the
Internal Control - Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020, based on criteria established in the
Internal Control - Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (the “PCAOB”), the consolidated financial statements of the Company as of December 31, 2020 and our report dated February 26, 2021 expressed an unqualified opinion.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting in the accompanying Report on Management’s Assessment of Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
| /s/ HORNE LLP | ||
| Memphis, Tennessee | ||
| February 26, 2021 | ||
73
Renasant Corporation and Subsidiaries
Consolidated Balance Sheets
(In Thousands, Except Share Data)
| December 31, | |||||||||||
| 2020 | 2019 | ||||||||||
| Assets | |||||||||||
| Cash and due from banks | $ |
|
$ |
|
|||||||
| Interest-bearing balances with banks |
|
|
|||||||||
| Cash and cash equivalents |
|
|
|||||||||
| Securities available for sale, at fair value |
|
|
|||||||||
| Loans held for sale, at fair value |
|
|
|||||||||
| Loans, net of unearned income: | |||||||||||
| Non purchased loans and leases |
|
|
|||||||||
| Purchased loans |
|
|
|||||||||
| Total loans, net of unearned income |
|
|
|||||||||
| Allowance for credit losses |
(
|
(
|
|||||||||
| Loans, net |
|
|
|||||||||
| Premises and equipment, net |
|
|
|||||||||
| Other real estate owned: | |||||||||||
| Non purchased |
|
|
|||||||||
| Purchased |
|
|
|||||||||
| Total other real estate owned, net |
|
|
|||||||||
| Goodwill |
|
|
|||||||||
| Other intangible assets, net |
|
|
|||||||||
| Bank-owned life insurance |
|
|
|||||||||
| Mortgage servicing rights |
|
|
|||||||||
| Other assets |
|
|
|||||||||
| Total assets | $ |
|
$ |
|
|||||||
| Liabilities and shareholders’ equity | |||||||||||
| Liabilities | |||||||||||
| Deposits | |||||||||||
| Noninterest-bearing | $ |
|
$ |
|
|||||||
| Interest-bearing |
|
|
|||||||||
| Total deposits |
|
|
|||||||||
| Short-term borrowings |
|
|
|||||||||
| Long-term debt |
|
|
|||||||||
| Other liabilities |
|
|
|||||||||
| Total liabilities |
|
|
|||||||||
| Shareholders’ equity | |||||||||||
|
Preferred stock, $
|
|
|
|||||||||
|
Common stock, $
|
|
|
|||||||||
|
Treasury stock, at cost,
|
(
|
(
|
|||||||||
| Additional paid-in capital |
|
|
|||||||||
| Retained earnings |
|
|
|||||||||
| Accumulated other comprehensive income, net of taxes |
|
|
|||||||||
| Total shareholders’ equity |
|
|
|||||||||
| Total liabilities and shareholders’ equity | $ |
|
$ |
|
|||||||
See Notes to Consolidated Financial Statements.
74
Renasant Corporation and Subsidiaries
Consolidated Statements of Income
(In Thousands, Except Share Data)
| Year Ended December 31, | |||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||
| Interest income | |||||||||||||||||
| Loans | $ |
|
$ |
|
$ |
|
|||||||||||
| Securities | |||||||||||||||||
| Taxable |
|
|
|
||||||||||||||
| Tax-exempt |
|
|
|
||||||||||||||
| Other |
|
|
|
||||||||||||||
| Total interest income |
|
|
|
||||||||||||||
| Interest expense | |||||||||||||||||
| Deposits |
|
|
|
||||||||||||||
| Borrowings |
|
|
|
||||||||||||||
| Total interest expense |
|
|
|
||||||||||||||
| Net interest income |
|
|
|
||||||||||||||
| Provision for loan losses |
|
|
|
||||||||||||||
| Provision for other credit losses |
|
|
|
||||||||||||||
| Provision for credit losses |
|
|
|
||||||||||||||
| Net interest income after provision for credit losses |
|
|
|
||||||||||||||
| Noninterest income | |||||||||||||||||
| Service charges on deposit accounts |
|
|
|
||||||||||||||
| Fees and commissions |
|
|
|
||||||||||||||
| Insurance commissions |
|
|
|
||||||||||||||
| Wealth management revenue |
|
|
|
||||||||||||||
| Mortgage banking income |
|
|
|
||||||||||||||
| Net gains (losses) on sales of securities |
|
|
(
|
||||||||||||||
| BOLI income |
|
|
|
||||||||||||||
| Other |
|
|
|
||||||||||||||
| Total noninterest income |
|
|
|
||||||||||||||
| Noninterest expense | |||||||||||||||||
| Salaries and employee benefits |
|
|
|
||||||||||||||
| Data processing |
|
|
|
||||||||||||||
| Net occupancy and equipment |
|
|
|
||||||||||||||
| Other real estate owned |
|
|
|
||||||||||||||
| Professional fees |
|
|
|
||||||||||||||
| Advertising and public relations |
|
|
|
||||||||||||||
| Intangible amortization |
|
|
|
||||||||||||||
| Communications |
|
|
|
||||||||||||||
| Merger and conversion related expenses |
|
|
|
||||||||||||||
| Restructuring charges |
|
|
|
||||||||||||||
| Swap termination fees |
|
|
|
||||||||||||||
| Debt prepayment penalty |
|
|
|
||||||||||||||
| Other |
|
|
|
||||||||||||||
| Total noninterest expense |
|
|
|
||||||||||||||
| Income before income taxes |
|
|
|
||||||||||||||
| Income taxes |
|
|
|
||||||||||||||
| Net income | $ |
|
$ |
|
$ |
|
|||||||||||
| Basic earnings per share | $ |
|
$ |
|
$ |
|
|||||||||||
| Diluted earnings per share | $ |
|
$ |
|
$ |
|
|||||||||||
| Cash dividends per common share | $ |
|
$ |
|
$ |
|
|||||||||||
See Notes to Consolidated Financial Statements.
75
Renasant Corporation and Subsidiaries
Consolidated Statements of Comprehensive Income
(In Thousands)
| Year Ended December 31, | |||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||
| Net income | $ |
|
$ |
|
$ |
|
|||||||||||
| Other comprehensive income, net of tax: | |||||||||||||||||
| Securities available for sale: | |||||||||||||||||
| Unrealized holding gains (losses) on securities |
|
|
(
|
||||||||||||||
| Reclassification adjustment for (gains) losses realized in net income |
(
|
|
|
||||||||||||||
| Total securities available for sale |
|
|
(
|
||||||||||||||
| Derivative instruments: | |||||||||||||||||
| Unrealized holding gains (losses) on derivative instruments |
|
(
|
|
||||||||||||||
| Reclassification adjustment for losses realized in net income related to swap termination |
|
|
|
||||||||||||||
| Total derivative instruments |
|
(
|
|
||||||||||||||
| Defined benefit pension and post-retirement benefit plans: | |||||||||||||||||
| Net gain arising during the period |
|
|
|
||||||||||||||
| Reclassification adjustment for settlement loss related to the VERP realized in net income |
|
|
|
||||||||||||||
| New prior service cost |
(
|
|
|
||||||||||||||
| Amortization of net actuarial loss recognized in net periodic pension cost |
|
|
|
||||||||||||||
| Amortization of prior service cost |
|
|
|
||||||||||||||
| Total defined benefit pension and post-retirement benefit plans |
|
|
|
||||||||||||||
| Other comprehensive income (loss), net of tax |
|
|
(
|
||||||||||||||
| Comprehensive income | $ |
|
$ |
|
$ |
|
|||||||||||
See Notes to Consolidated Financial Statements.
76
Renasant Corporation and Subsidiaries
Consolidated Statements of Changes in Shareholders’ Equity
(In Thousands, Except Share Data)
|
|
Common Stock | Treasury Stock | Additional Paid-In Capital | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | ||||||||||||||||||||||||||||||||||||
| Shares | Amount | Total | |||||||||||||||||||||||||||||||||||||||
| Balance at January 1, 2018 |
|
$ |
|
$ |
(
|
$ |
|
$ |
|
$ |
(
|
$ |
|
||||||||||||||||||||||||||||
| Net income | — | — | — | — |
|
— |
|
||||||||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | — | — |
(
|
(
|
||||||||||||||||||||||||||||||||||
| Comprehensive income |
|
||||||||||||||||||||||||||||||||||||||||
| Repurchase of shares in connection with stock repurchase program |
(
|
— |
(
|
— | — | — |
(
|
||||||||||||||||||||||||||||||||||
|
Cash dividends ($
|
— | — | — | — |
(
|
— |
(
|
||||||||||||||||||||||||||||||||||
| Common stock issued in connection with an acquisition |
|
|
— |
|
— | — |
|
||||||||||||||||||||||||||||||||||
| Repurchase of shares in connection with acquisition related to stock-based compensation awards |
(
|
— |
(
|
— | — | — |
(
|
||||||||||||||||||||||||||||||||||
| Issuance of common stock for stock-based compensation awards |
|
— |
|
(
|
— | — |
(
|
||||||||||||||||||||||||||||||||||
| Stock-based compensation expense | — | — | — |
|
— | — |
|
||||||||||||||||||||||||||||||||||
| Other, net | — | — | — |
|
— | — |
|
||||||||||||||||||||||||||||||||||
| Balance at December 31, 2018 |
|
$ |
|
$ |
(
|
$ |
|
$ |
|
$ |
(
|
$ |
|
||||||||||||||||||||||||||||
| Net income | — | — | — | — |
|
— |
|
||||||||||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | — | — |
|
|
||||||||||||||||||||||||||||||||||
| Comprehensive income |
|
||||||||||||||||||||||||||||||||||||||||
| Repurchase of shares in connection with stock repurchase program |
(
|
— |
(
|
— | — | — |
(
|
||||||||||||||||||||||||||||||||||
|
Cash dividends ($
|
— | — | — | — |
(
|
— |
(
|
||||||||||||||||||||||||||||||||||
| Issuance of common stock for stock-based compensation awards |
|
— |
|
(
|
— | — |
(
|
||||||||||||||||||||||||||||||||||
| Stock-based compensation expense | — | — | — |
|
— | — |
|
||||||||||||||||||||||||||||||||||
| Balance at December 31, 2019 |
|
$ |
|
$ |
(
|
$ |
|
$ |
|
$ |
|
$ |
|
||||||||||||||||||||||||||||
|
Cumulative effect adjustment due to the adoption of
|
— | — | — | — |
(
|
— |
(
|
||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — |
|
— |
|
||||||||||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | — | — |
|
|
||||||||||||||||||||||||||||||||||
| Comprehensive income |
|
||||||||||||||||||||||||||||||||||||||||
| Repurchase of shares in connection with stock repurchase program |
(
|
— |
(
|
— | — | — |
(
|
||||||||||||||||||||||||||||||||||
|
Cash dividends ($
|
— | — | — | — |
(
|
— |
(
|
||||||||||||||||||||||||||||||||||
| Issuance of common stock for stock-based compensation awards |
|
— |
|
(
|
— | — |
(
|
||||||||||||||||||||||||||||||||||
| Stock-based compensation expense | — | — | — |
|
— | — |
|
||||||||||||||||||||||||||||||||||
| Balance at December 31, 2020 |
|
$ |
|
$ |
(
|
$ |
|
$ |
|
$ |
|
$ |
|
||||||||||||||||||||||||||||
See Notes to Consolidated Financial Statements.
77
Renasant Corporation and Subsidiaries
Consolidated Statements of Cash Flows
(In Thousands, Except Share Data)
| Year Ended December 31, | |||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||
| Operating activities | |||||||||||||||||
| Net income | $ |
|
$ |
|
$ |
|
|||||||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||||||||
| Provision for credit losses |
|
|
|
||||||||||||||
| Depreciation, amortization and accretion |
|
|
|
||||||||||||||
| Deferred income tax (benefit) expense |
(
|
|
|
||||||||||||||
| Funding of mortgage loans held for sale |
(
|
(
|
(
|
||||||||||||||
| Proceeds from sales of mortgage loans held for sale |
|
|
|
||||||||||||||
| Gains on sales of mortgage loans held for sale |
(
|
(
|
(
|
||||||||||||||
| Valuation adjustment to mortgage servicing rights |
|
|
|
||||||||||||||
| (Gains) losses on sales of securities |
(
|
(
|
|
||||||||||||||
| Penalty on prepayment of debt |
|
|
|
||||||||||||||
| Losses (gains) on sales of premises and equipment |
|
(
|
(
|
||||||||||||||
| Stock-based compensation |
|
|
|
||||||||||||||
| Net change in other loans held for sale |
|
|
|
||||||||||||||
| (Increase) decrease in other assets |
(
|
|
(
|
||||||||||||||
| Increase (decrease) in other liabilities |
|
(
|
(
|
||||||||||||||
| Net cash provided by operating activities |
|
|
|
||||||||||||||
| Investing activities | |||||||||||||||||
| Purchases of securities available for sale |
(
|
(
|
(
|
||||||||||||||
| Proceeds from sales of securities available for sale |
|
|
|
||||||||||||||
| Proceeds from call/maturities of securities available for sale |
|
|
|
||||||||||||||
| Net increase in loans |
(
|
(
|
(
|
||||||||||||||
| Purchases of premises and equipment |
(
|
(
|
(
|
||||||||||||||
| Proceeds from sales of premises and equipment |
|
|
|
||||||||||||||
| Net change in FHLB stock |
|
(
|
(
|
||||||||||||||
| Proceeds from sales of other assets |
|
|
|
||||||||||||||
| Net cash (paid) received in acquisition |
|
(
|
|
||||||||||||||
| Other, net |
|
|
|
||||||||||||||
| Net cash used in investing activities |
(
|
(
|
(
|
||||||||||||||
| Financing activities | |||||||||||||||||
| Net increase in noninterest-bearing deposits |
|
|
|
||||||||||||||
| Net increase (decrease) in interest-bearing deposits |
|
(
|
|
||||||||||||||
| Net (decrease) increase in short-term borrowings |
(
|
|
|
||||||||||||||
| Proceeds from long-term debt |
|
|
|
||||||||||||||
| Repayment of long-term debt |
(
|
(
|
(
|
||||||||||||||
| Cash paid for dividends |
(
|
(
|
(
|
||||||||||||||
| Repurchase of shares in connection with stock repurchase program |
(
|
(
|
(
|
||||||||||||||
| Cash received on exercise of stock options |
|
|
|
||||||||||||||
| Net cash provided by financing activities |
|
|
|
||||||||||||||
| Net increase (decrease) in cash and cash equivalents |
|
(
|
|
||||||||||||||
| Cash and cash equivalents at beginning of year |
|
|
|
||||||||||||||
| Cash and cash equivalents at end of year | $ |
|
$ |
|
$ |
|
|||||||||||
See Notes to Consolidated Financial Statements.
78
Renasant Corporation and Subsidiaries
Consolidated Statements of Cash Flows (continued)
| Year Ended December 31, | |||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||
| Supplemental disclosures | |||||||||||||||||
| Cash paid for interest | $ |
|
$ |
|
$ |
|
|||||||||||
| Cash paid for income taxes | $ |
|
$ |
|
$ |
|
|||||||||||
| Noncash transactions: | |||||||||||||||||
| Transfers of loans to other real estate | $ |
|
$ |
|
$ |
|
|||||||||||
| Financed sales of other real estate owned | $ |
|
$ |
|
$ |
|
|||||||||||
| Transfers of mortgage loans held for sale to loans held for investment | $ |
|
$ |
|
$ |
|
|||||||||||
| Transfers of other loans held for sale to loans held for investment | $ |
|
$ |
|
$ |
|
|||||||||||
| Common stock issued in acquisition of businesses | $ |
|
$ |
|
$ |
|
|||||||||||
| Recognition of operating right-of-use assets | $ |
|
$ |
|
$ |
|
|||||||||||
| Recognition of operating lease liabilities | $ |
|
$ |
|
$ |
|
|||||||||||
See Notes to Consolidated Financial Statements.
79
Renasant Corporation and Subsidiaries
Notes to Consolidated Financial Statements
Note 1 –
Significant Accounting Policies
(Dollar amounts in thousands)
Securities
: Debt securities are classified as held to maturity when purchased if management has the positive intent and ability to hold the securities to maturity. Held to maturity securities are stated at amortized cost. Presently, the Company has no intention of establishing a trading classification. Securities not classified as held to maturity or trading are classified as available for sale. Available for sale securities are stated at fair value, with the unrealized gains and losses, net of tax, reported in accumulated other comprehensive income within shareholders’ equity.
The amortized cost of securities, regardless of classification, is adjusted for amortization of premiums and accretion of discounts. Such amortization and accretion is included in interest income from securities, as is dividend income. Realized gains and losses on sales of securities are reflected under the line item “Net gains (losses) on sales of securities” on the Consolidated Statements of Income. The cost of securities sold is based on the specific identification method.
The Company evaluates its investment portfolio for credit-related impairment on a quarterly basis in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification Topic (“ASC”) 326, “
Financial Instruments - Credit Losses
(“ASC 326”). Impairment is assessed at the individual security level. The Company considers an investment security impaired if the fair value of the security is less than its amortized cost basis. If the Company intends to sell the security or it is more likely than not that it will be required to sell before recovery, the entire impairment amount is recorded as a loss within noninterest income in the Consolidated Statements of Income with a corresponding adjustment to the amortized cost basis of the security. If the Company does not intend to sell the security and it is not more likely than not that it will be required to sell the security before recovery of its amortized cost basis, the Company evaluates if any of the impairment is related to a potential credit loss. The amount, if any, related to credit loss is recognized in earnings as a provision for credit loss and a corresponding allowance for credit losses is established and is calculated as the difference between the estimate of discounted future cash flows and the amortized cost basis of the security. A number of qualitative and quantitative factors, including the financial condition of the underlying issuer and current and projected deferrals or defaults, are considered by management in the estimate of the discounted future cash flows. The remaining difference between the fair value and the amortized cost basis of the security is considered the amount related to other market factors and is recognized in other comprehensive income, net of applicable taxes.
80
Renasant Corporation and Subsidiaries
Notes to Consolidated Financial Statements
Note 1 – Significant Accounting Policies (continued)
Loans and the Allowance for Credit Losse
s: Loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off generally are reported at their amortized cost or outstanding unpaid principal balances, in either case adjusted for charge-offs, the allowance for credit losses, any deferred fees or costs on originated loans and any purchase discounts or premiums on purchased loans. Renasant Bank defers certain nonrefundable loan origination fees as well as the direct costs of originating or acquiring loans. The deferred fees and costs are then amortized over the term of the note for all loans with payment schedules. Loans with no payment schedule are amortized using the interest method. The amortization of these deferred fees is presented as an adjustment to the yield on loans. Interest income is accrued on the unpaid principal balance.
Loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due. Generally, the recognition of interest on mortgage and commercial and industrial loans is discontinued at the time the loan is
90
days past due unless the credit is well-secured and in process of collection. Consumer and other retail loans are typically charged-off no later than the time the loan is
120
days past due. In all cases, loans are placed on nonaccrual status or charged-off at an earlier date if collection of principal or interest is considered doubtful. Loans may be placed on nonaccrual regardless of whether or not such loans are considered past due. All interest accrued for the current year, but not collected, for loans that are placed on nonaccrual or charged-off is reversed against interest income, the amount of which is immaterial for the year ended December 31, 2020. The interest on these loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Interest income recognized on nonaccrual loans was immaterial for the year ended December 31, 2020. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured. As a result, the Company has made an accounting policy election to exclude accrued interest from the measurement of the allowance for credit losses. As of December 31, 2020 and 2019, the Company has accrued interest receivable for loans of $
56,459
and $
33,679
, respectively, which is recorded in the “Other assets” line item on the Consolidated Balance Sheets.
Restructured loans are those for which concessions have been granted to the borrower due to a deterioration of the borrower’s financial condition and are performing in accordance with the new terms. Such concessions may include reduction in interest rates or deferral of interest or principal payments. In evaluating whether to restructure a loan, management analyzes the long-term financial condition of the borrower, including guarantor and collateral support, to determine whether the proposed concessions will increase the likelihood of repayment of principal and interest. Restructured loans that are not performing in accordance with their restructured terms that are either contractually
90
days past due or have been placed on nonaccrual status are reported as nonperforming loans.
The allowance for credit losses is an estimate of expected losses inherent within the Company’s loans held for investment portfolio and is maintained at a level believed adequate by management to absorb credit losses inherent in the entire loan portfolio in accordance with ASC 326. Management evaluates the adequacy of the allowance for credit losses on a quarterly basis. Expected credit loss inherent in non-cancellable off-balance-sheet credit exposures is accounted for as a separate liability in the Consolidated Balance Sheets. The allowance for credit losses for loans held for investment, as reported in the Company’s Consolidated Balance Sheets, is adjusted by a provision for credit losses, which is reported in earnings, and reduced by net charge-offs. Loan losses are charged against the allowance for credit losses when management believes the uncollectability of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.
The credit loss estimation process involves procedures to appropriately consider the unique characteristics of the Company’s loan portfolio segments. Credit quality is assessed and monitored by evaluating various attributes, and the results of those evaluations are utilized in underwriting new loans and in the Company’s process for the estimation of expected credit losses. Credit quality monitoring procedures and indicators can include an assessment of problem loans, the types of loans, historical
81
Renasant Corporation and Subsidiaries
Notes to Consolidated Financial Statements
Note 1 – Significant Accounting Policies (continued)
loss experience, new lending products, emerging credit trends, changes in the size and character of loan categories and other factors, including the Company’s risk rating system, regulatory guidance and economic conditions, such as the unemployment rate and GDP growth in the markets in which the Company operates, as well as trends in the market values of underlying collateral securing loans, all as determined based on input from management, loan review staff and other sources. This evaluation is complex and inherently subjective, as it requires estimates by management that are inherently uncertain and therefore susceptible to significant revision as more information becomes available. In future periods, evaluations of the overall loan portfolio, in light of the factors and forecasts then prevailing, may result in significant changes in the allowance and provision for credit losses in those future periods.
The methodology for estimating the amount of expected credit losses reported in the allowance for credit losses has two basic components: first, a collective or pooled component for estimating expected credit losses for pools of loans that share similar risk characteristics; and second, an asset-specific component involving individual loans that do not share risk characteristics with other loans and the measurement of expected credit losses for such individual loans.
Loans Evaluated on a Collective (Pool) Basis
The allowance for credit losses for loans that share similar risk characteristics with other loans is calculated on a collective or pool basis, where such loans are segregated into loan portfolio segments based upon similarity of credit risk. The Company’s primary loan portfolio segments are as follows:
Commercial, Financial, and Agricultural (“Commercial”)
-
Commercial loans are customarily granted to established local business customers in the Company’s market area on a collateralized basis to meet their credit needs. Maturities are typically short term in nature and are commensurate with the secondary source of repayment that serves as the Company’s collateral. Although commercial loans may be collateralized by equipment or other business assets, the repayment of this type of loan depends primarily on the creditworthiness and projected cash flow of the borrower (and any guarantors). Thus, the chief considerations when assessing the risk of a commercial loan are the local business borrower’s ability to sell its products/services, thereby generating sufficient operating revenue to repay the Company under the agreed upon terms and conditions, and the general business conditions of the local economy or other market that the business serves.
Real Estate - Construction
-
The Company’s construction loan portfolio consists of loans for the construction of single family residential properties, multi-family properties and commercial projects. Maturities for construction loans generally range from
6
to
12
months for residential properties and from
24
to
36
months for non-residential and multi-family properties. The source of repayment of a construction loan comes from the sale or lease of newly-constructed property, although often construction loans are repaid with the proceeds of a commercial real estate loan that the Company makes to the owner or lessor of the newly-constructed property.
Real Estate - 1-4 Family Mortgage
-
This segment of the Company’s loan portfolio includes loans secured by first or second liens on residential real estate in which the property is the principal residence of the borrower, as well as loans secured by residential real estate in which the property is rented to tenants or is not the principal residence of the borrower; loans for the preparation of residential real property prior to construction are also included in this segment. Finally, this segment includes home equity loans or lines of credit and term loans secured by first and second mortgages on the residences of borrowers who elect to use the accumulated equity in their homes for purchases, refinances, home improvements, education and other personal expenditures. The Company attempts to minimize the risk associated with residential real estate loans by scrutinizing the financial condition of the borrower; typically, the maximum loan-to-value ratio is also limited.
Real Estate - Commercial Mortgage
-
Included in this portfolio segment (referred to collectively as “commercial real estate loans”) are “owner-occupied” loans in which the owner develops a property with the intention of locating its business there. Payments on these loans are dependent on the successful development and management of the business as well as the borrower’s ability to generate sufficient operating revenue to repay the loan. In some instances, in addition to the mortgage on the underlying real estate of the business, the commercial real estate loans are secured by other non-real estate collateral, such as equipment or other assets used in the business. In addition to owner-occupied commercial real estate loans, the Company offers loans in which the owner develops a property where the source of repayment of the loan will come from the sale or lease of the developed property, for example, retail shopping centers, hotels and storage facilities. These loans are referred to as “non-owner occupied” commercial real estate loans. The Company also offers commercial real estate loans to developers of commercial properties for purposes of site acquisition and preparation and other development prior to actual construction (referred to as “commercial land development loans”). Non-owner occupied commercial real estate loans and commercial land
82
Renasant Corporation and Subsidiaries
Notes to Consolidated Financial Statements
Note 1 – Significant Accounting Policies (continued)
development loans are dependent on the successful completion of the project and may be affected by adverse conditions in the real estate market or the economy as a whole.
Lease Financing
-
This segment of the Company’s loan portfolio includes loans granted to provide capital to businesses for commercial equipment needs. These loans are generally granted for periods ranging between
and
five years
at fixed rates of interest. Loss or decline of income by the borrower due to unplanned occurrences represents the primary risk of default to the Company. In the event of default, a shortfall in the value of the collateral may pose a loss in this loan category. The Company obtains a lien against the collateral securing the loan and holds title (if applicable) until the loan is repaid in full. Transportation, manufacturing, healthcare, material handling, printing and construction are the industries that typically obtain lease financing.
Installment Loans to Individuals - Installment loans to individuals (or “consumer loans”) are granted to individuals for the purchase of personal goods. Loss or decline of income by the borrower due to unplanned occurrences represents the primary risk of default to the Company. In the event of default, a shortfall in the value of the collateral may pose a loss in this loan category. Before granting a consumer loan, the Company assesses the applicant’s credit history and ability to meet existing and proposed debt obligations. Although the applicant’s creditworthiness is the primary consideration, the underwriting process also includes a comparison of the value of the collateral, if any, to the proposed loan amount. The Company obtains a lien against the collateral securing the loan and holds title until the loan is repaid in full.
In determining the allowance for credit losses on loans evaluated on a collective basis, the Company categorizes loan pools based on loan type and/or risk rating. The Company uses two CECL models: (1) a loss rate model, based on average historical life-of-loan loss rates, which is used for the Real Estate - 1-4 Family Mortgage, Real Estate - Construction and the Installment Loans to Individuals portfolio segments, and (2) for the C&I, Real Estate - Commercial Mortgage and Lease Financing portfolio segments, the Company uses a probability of default/loss given default model, which calculates an expected loss percentage for each loan pool by considering (a) the probability of default, based on the migration of loans from performing (using risk ratings) to default using life-of-loan analysis periods, and (b) the historical severity of loss, based on the aggregate net lifetime losses incurred per loan pool.
The historical loss rates calculated as described above are adjusted, as necessary, for both internal and external qualitative factors where there are differences in the historical loss data of the Company and current or projected future conditions. Internal factors include loss history, changes in credit quality (including movement between risk ratings) and/or credit concentration, the nature and volume of the respective loan portfolio segments, and changes in lending or loan review staffing. External factors include current and reasonable and supportable forecasted economic conditions, the competitive environment and changes in collateral values. These factors are used to adjust the historical loss rates (as described above) to ensure that they reflect management’s expectation of future conditions based on a reasonable and supportable forecast period. To the extent the lives of the loans in the portfolio extend beyond the period for which a reasonable and supportable forecast can be made, when necessary, the models immediately revert back to the historical loss rates adjusted for qualitative factors related to current conditions.
Loans Evaluated on an Individual Basis
For loans that do not share similar risk characteristics with other loans, an individual analysis is performed to determine the expected credit loss. If the respective loan is collateral dependent (that is, when the borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the operation or sale of the collateral), the expected credit loss is measured as the difference between the amortized cost basis of the loan and the fair value of the collateral. The fair value of collateral is initially based on external appraisals. Generally, collateral values for loans for which measurement of expected losses is dependent on the fair value of such collateral are updated every twelve months, either from external third parties or in-house certified appraisers. Third-party appraisals are obtained from a pre-approved list of independent, third-party, local appraisal firms. The fair value of the collateral derived from external appraisal is then adjusted for the estimated cost to sell if repayment or satisfaction of a loan is dependent on the sale (rather than only on the operation) of the collateral. Other acceptable methods for determining the expected credit losses for individually evaluated loans (typically used when the loan is not collateral dependent) is a discounted cash flow approach or, if applicable, an observable market price. Once the expected credit loss amount is determined, an allowance equal to such expected credit loss is included in the allowance for credit losses.
The Company considers the loans in the Real Estate - Construction, Real Estate - 1-4 Family Mortgage and Real Estate - Commercial Mortgage loan segments disclosed as individually evaluated in Note 5, “Allowance for Credit Losses” as collateral dependent with the type of collateral being real estate.
83
Renasant Corporation and Subsidiaries
Notes to Consolidated Financial Statements
Note 1 – Significant Accounting Policies (continued)
See Note 3, “ Non Purchased Loans,” Note 4, “Purchased Loans,” and Note 5, “ Allowance for Credit Losses” for disclosures regarding the Company’s past due and nonaccrual loans, impaired loans and restructured loans and its allowance for credit losses.
Business Combinations, Accounting for Purchased Credit Deteriorated Loans and Related Assets
: Business combinations are accounted for by applying the acquisition method in accordance with ASC 805, “
Business Combinations
.” Under the acquisition method, identifiable assets acquired and liabilities assumed and any non-controlling interest in the acquired company at the acquisition date are measured at their fair values as of that date and are recognized separately from goodwill. Results of operations of the acquired entities are included in the Consolidated Statements of Income from the date of acquisition. Acquisition costs incurred by the Company are expensed as incurred.
For a purchased asset that the Company has the intent of holding for investment, ASC 326 requires the Company to determine whether the asset has experienced more-than-insignificant deterioration in credit quality since origination. Assets that have experienced more-than insignificant deterioration are referred to as purchased credit deteriorated (“PCD”) assets. ASC 326 provides for special initial recognition of PCD assets, commonly referred to as the “gross-up” approach, whereas the allowance for credit losses is recognized by adding it to the fair value to arrive at the Day 1 amortized cost basis. After initial recognition, the accounting for PCD assets will generally follow the credit loss model that applies to that type of asset. Non-PCD assets record the Day 1 allowance for credit losses through earnings on the date of purchase. The Company will accrete or amortize as interest income the fair value discounts on both PCD and non-PCD assets over the life of the asset.
Premises and Equipment
: Premises and equipment are stated at cost less accumulated depreciation. Depreciation is computed primarily by use of the straight-line method for furniture, fixtures, equipment, autos and premises. The annual provisions for depreciation have been computed primarily using estimated lives of
forty years
for premises,
to
seven years
for furniture and equipment and
to
five years
for computer equipment and autos. Leasehold improvements are expensed over the period of the leases or the estimated useful life of the improvements, whichever is shorter.
ASC 842, “
Leases
” requires a lessee to recognize a right-of-use asset and a lease liability for all leases with a term greater than twelve months on its balance sheet regardless of whether the lease is classified as financing or operating.
All of the Company’s lessee arrangements are operating leases, being real estate leases for Company facilities. Under these arrangements, the Company records right-of-use assets and corresponding lease liabilities, each of which is based on the present value of the remaining lease payments and are discounted at the Company’s incremental borrowing rate. Right-of-use assets are reported in premises and equipment on the Consolidated Balance Sheets and the related lease liabilities are reported in other liabilities. All leases are recorded on the Consolidated Balance Sheets except for leases with an initial term less than 12 months for which the Company elected the short-term lease recognition exemption. Lease terms may contain renewal and extension options and early termination features. Many leases include one or more options to renew, with renewal terms that can extend the lease term from
to
20
years or more. The exercise of lease renewal options is at the Company’s sole discretion. Renewal options which are reasonably certain to be exercised in the future were included in the measurement of right-of-use assets and lease liabilities.
84
Renasant Corporation and Subsidiaries
Notes to Consolidated Financial Statements
Note 1 – Significant Accounting Policies (continued)
Revenue from Contracts with Customers
: ASC 606, “
Revenue from Contracts with Customers
” (“ASC 606”) provides guidance on revenue recognition from contracts with customers. For revenue streams within its scope, ASC 606 requires costs that are incremental to obtaining a contract to be capitalized. In the case of the Company, these costs include sales commissions for insurance and wealth management products. ASC 606 has established, and the Company has utilized, a practical expedient allowing costs that, if capitalized, would have an amortization period of one year or less to instead be expensed as incurred.
Service Charges on Deposit Accounts
Service charges on deposit accounts include maintenance fees on accounts, per item charges, account enhancement charges for additional packaged benefits and overdraft fees. The contracts with deposit account customers are day-to-day contracts and are considered to be terminable at will by either party. Therefore, the fees are all considered to be earned when charged and simultaneously collected.
85
Renasant Corporation and Subsidiaries
Notes to Consolidated Financial Statements
Note 1 – Significant Accounting Policies (continued)
Fees and Commissions
Fees and commissions include fees related to deposit services, such as ATM fees and interchange fees on debit card transactions. These fees are earned at the point in time when the services are rendered, and therefore the related revenue is recognized as the Company’s performance obligation is satisfied.
Insurance Commissions
Insurance commissions are earned when policies are placed by customers with the insurance carriers and are collected and recognized using two different methods: the agency bill method and the direct bill method.
Under the agency bill method, Renasant Insurance is responsible for billing the customers directly and then collecting and remitting the premiums to the insurance carriers. Agency bill revenue is recognized at the later of the invoice date or effective date of the policy. The Company has established a reserve for such policies which is derived from historical collection experience and updated annually. The contract balances (i.e. accounts receivable and accounts payable related to insurance commissions earned and premiums due) and the reserve established are considered inconsequential to the overall financial results of the Company.
Under the direct bill method, premium billing and collections are handled by the insurance carriers, and a commission is then paid to Renasant Insurance. Direct bill revenue is recognized when the cash is received from the insurance carriers. While there is recourse on these commissions in the event of policy cancellations, based on the Company’s historical data, significant or material reversals of revenue based on policy cancellations are not anticipated. The Company monitors policy cancellations on a monthly basis and, if a significant or material set of transactions were to occur, the Company would adjust earnings accordingly.
The Company also earns contingency income that it recognizes on a cash basis. Contingency income is a bonus received from the insurance underwriters and is based on commission income and claims experience on the Company’s clients’ policies during the previous year. Increases and decreases in contingency income are reflective of corresponding increases and decreases in the amount of claims paid by insurance carriers.
Wealth Management Revenue
Fees for managing trust accounts (inclusive of personal and corporate benefit accounts, IRAs, and custodial accounts) are based on the value of assets under management in the account, with the amount of the fee depending on the type of account. Revenue is recognized on a monthly basis, and there is little to no risk of a material reversal of revenue.
Fees for other wealth management services, such as investment guidance relating to fixed and variable annuities, mutual funds, stocks and other investments, are recognized based on either trade activity, where fees are recognized at the time of the trade, or assets under management, where fees are recognized monthly.
Sales of Other Real Estate Owned
The Company continually markets the properties included in the OREO portfolio. The Company will at times, in the ordinary course of business, provide seller-financing on sales of OREO. In cases where a sale is seller-financed, the Company must ensure the commitment of both parties to perform their respective obligations and the collectability of the transaction price in order to properly recognize the revenue on the sale of OREO. This is accomplished through the Company’s loan underwriting process. In this process the Company considers things such as the buyer’s initial equity in the property, the credit quality of the buyer, the financing terms of the loan and the cash flow from the property, if applicable. If it is determined that the contract criteria in ASC 606 have been met, the revenue on the sale of OREO will be recognized on the closing date of the sale when the Company has transferred title to the buyer and obtained the right to receive payment for the property. In instances where sales are not seller-financed, the Company recognizes revenue on the closing date of the sale when the Company has obtained payment for the property and transferred title to the buyer. For additional information on OREO, please see Note 7, “Other Real Estate Owned.”
86
Renasant Corporation and Subsidiaries
Notes to Consolidated Financial Statements
Note 1 – Significant Accounting Policies (continued)
subsidiaries file a consolidated federal income tax return. Renasant Bank provides for income taxes on a separate-return basis and remits to the Company amounts determined to be currently payable.
Deferred income taxes, included in “Other assets” on the Consolidated Balance Sheets, reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Realization of deferred tax assets is dependent upon the generation of a sufficient level of future taxable income and recoverable taxes paid in prior years. Although realization is not assured, management believes that the Company and its subsidiaries will realize a substantial majority of the deferred tax assets. A valuation allowance, if needed, reduces deferred tax assets to the expected amount most likely to be realized through a charge to income tax expense.
Derivative Instruments and Hedging Activities
: The Company utilizes derivative financial instruments as part of its ongoing efforts to manage its interest rate risk exposure. Derivative financial instruments are included in the Consolidated Balance Sheets line item “Other assets” or “Other liabilities” at fair value in accordance with ASC 815, “
Derivatives and Hedging
.”
Cash flow hedges are utilized to mitigate the exposure to variability in expected future cash flows or other types of forecasted transactions. For the Company’s derivatives designated as cash flow hedges, changes in the fair value of cash flow hedges are, to the extent that the hedging relationship is effective, recorded as other comprehensive income and are subsequently recognized in earnings at the same time that the hedged item is recognized in earnings. The ineffective portions of the changes in fair value of the hedging instruments are immediately recognized in earnings. The assessment of the effectiveness of the hedging relationship is evaluated under the hypothetical derivative method.
Fair value hedges are utilized to mitigate the exposure to future interest rate risk. For the Company’s derivatives designated as fair value hedges, the gain or loss on the derivative instrument as well as the offsetting loss or gain on the hedged liability attributable to the hedged risk are recognized in current earnings. The gain or loss on the derivative instrument is presented on the same line item as the earnings effect of the hedged item.
The Company also utilizes derivative instruments that are not designated as hedging instruments. The Company enters into interest rate cap and/or floor agreements with its customers and then enters into an offsetting derivative contract position with other financial institutions to mitigate the interest rate risk associated with these customer contracts. Because these derivative instruments are not designated as hedging instruments, changes in the fair value of the derivative instruments are recognized currently in earnings.
The Company enters into interest rate lock commitments on certain residential mortgage loans with its customers to mitigate the interest rate risk associated with the commitments to fund fixed-rate mortgage loans. Under such commitments, interest rates for a mortgage loan are typically locked in for up to
45
days with the customer. These interest rate lock commitments are recorded at fair value in the Company’s Consolidated Balance Sheets. Gains and losses arising from changes in the valuation of the commitments are recognized currently in earnings and are reflected under the line item “Mortgage banking income” on the Consolidated Statements of Income.
The Company utilizes two methods to deliver mortgage loans to be sold to an investor. Under a “best efforts” sales agreement, the Company enters into a sales agreement with an investor in the secondary market to sell the loan when an interest rate lock commitment is entered into with a customer, as described above. Under a “best efforts” sales agreement, the Company is obligated to sell the mortgage loan to the investor only if the loan is closed and funded. Thus, the Company will not incur any liability to an investor if the mortgage loan commitment in the pipeline fails to close. Under a “mandatory delivery” sales agreement, the Company commits to deliver a certain principal amount of mortgage loans to an investor at a specified price and delivery date. Penalties are paid to the investor should the Company fail to satisfy the contract. These types of mortgage loan commitments are recorded at fair value in the Company’s Consolidated Balance Sheets. Gains and losses arising from changes
87
Renasant Corporation and Subsidiaries
Notes to Consolidated Financial Statements
Note 1 – Significant Accounting Policies (continued)
Impact of Recently-Issued Accounting Standards and Pronouncements
:
In June 2016, FASB issued Accounting Standards Update (“ASU”) 2016-13,
“Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”
(“ASU 2016-13”), which updated ASC 326. ASU 2016-13 significantly changed the way entities recognize impairment on many financial assets by requiring immediate recognition of estimated credit losses expected to occur over the asset’s remaining life. FASB describes this impairment recognition model as the current expected credit loss (“CECL”) model and believes the CECL model will result in more timely recognition of credit losses since the CECL model incorporates expected credit losses versus incurred credit losses. The scope of FASB’s CECL model includes loans, held-to-maturity debt instruments, lease receivables, loan commitments and financial guarantees that are not accounted for at fair value. Additionally, ASU 2016-13 amended the accounting for credit losses on available for sale securities and PCD assets. In the remainder of these Notes to Consolidated Financial Statements, unless the context clearly provides otherwise, references to “CECL” or to “ASC 326” shall mean the accounting standards and principles set forth in ASC 326 after giving effect to ASU 2016-13 and the clarifications thereto discussed in the next paragraph.
Over the course of 2018 and 2019, FASB issued a number of updates clarifying various matters arising under ASU 2016-13, including the following: (1) ASU 2018-19 was issued to clarify that receivables arising from operating leases are not within the scope of Subtopic 326-20; instead, impairment of receivables arising from operating leases should be accounted for in accordance with ASC 842,
"Leases"
(“ASC 842”); (2) ASU 2019-04 provides entities alternatives for measurement of accrued interest receivable, clarifies the steps entities should take when recording the transfer of loans or debt securities between measurement classifications or categories and clarifies that entities should include expected recoveries on financial assets; (3) ASU 2019-05 was issued to provide entities that have certain instruments within the scope of Subtopic 320-20 with an option to irrevocably elect the fair value option in Subtopic 825-10; and (4) ASU 2019-11 was issued to address stakeholders’ specific
88
Renasant Corporation and Subsidiaries
Notes to Consolidated Financial Statements
Note 1 – Significant Accounting Policies (continued)
issues relating to expected recoveries on PCD assets and transition and disclosure relief related to troubled debt restructured loans and accrued interest, respectively.
ASU 2016-13 became effective on January 1, 2020 for publicly-traded companies like the Company. To implement CECL, entities are required to apply a one-time cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year of adoption, as disclosed in the table below.
|
December 31, 2019
(as reported) |
Impact of ASU 2016-13 Adoption |
January 1, 2020
(adjusted) |
|||||||||
| Assets: | |||||||||||
| Allowance for credit losses | $ |
(
|
$ |
(
|
$ |
(
|
|||||
| Deferred tax assets, net | $ |
|
$ |
|
$ |
|
|||||
| Remaining purchase discount on loans | $ |
(
|
$ |
|
$ |
(
|
|||||
| Liabilities: | |||||||||||
| Reserve for unfunded commitments | $ |
|
$ |
|
$ |
|
|||||
| Shareholders’ equity: | |||||||||||
| Retained earnings | $ |
|
$ |
(
|
$ |
|
|||||
The Company used the prospective transition approach for PCD loans that were previously classified as purchased credit impaired (“PCI”) and accounted for under ASC 310-30, “
Loans and Debt Securities Acquired with Deteriorated Credit Quality
” (“ASC 310-30”). As permitted under ASC 326, the Company did not reassess whether PCI assets met the criteria of PCD assets as of the date of adoption of ASC 326. As shown in the table above, the amortized cost basis of the PCD assets was adjusted to reflect the addition of $
5,469
to the allowance for credit losses. The remaining noncredit discount will be accreted into interest income.
The prospective transition approach was also used for debt securities for which other-than-temporary impairment had been recognized prior to January 1, 2020. As a result, the amortized cost basis remained the same before and after the effective date of the adoption of CECL.
In January 2017, FASB issued ASU 2017-04,
“Intangibles - Goodwill and Other (Topic 350)”
(“ASU 2017-04”), which amends and simplifies current goodwill impairment testing by eliminating certain testing under the earlier provisions. Under the new guidance, an entity performs the goodwill impairment test by comparing the fair value of a reporting unit with its carrying value and recognizes an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if a quantitative impairment test is necessary. ASU 2017-04 was adopted on January 1, 2020 and did not have a material impact on the Company’s financial statements.
In August 2018, FASB issued ASU 2018-13,
“Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement”
(“ASU 2018-13”), which is intended to improve the disclosures on fair value measurements by eliminating, amending and adding certain disclosure requirements. These changes are intended to reduce costs for preparers while providing more useful information for financial statement users. ASU 2018-13 was adopted on January 1, 2020 and did not have a material impact on the Company’s financial statements.
In March 2019, FASB issued ASU 2019-01,
“Leases (Topic 842): Codification Improvements”
(“ASU 2019-01”), which is intended to clarify potential implementation questions related to ASC 842. This includes clarification on the determination of fair value of underlying assets by lessors that are not manufacturers or dealers, cash flow presentation of sales-type and direct financing leases and transition disclosures related to accounting changes and error corrections. ASU 2019-01 was adopted on January 1, 2020 and did not have a material impact on the Company’s financial statements.
In March 2020, FASB issued ASU 2020-04,
“Reference Rate Reform (Topic 842): Facilitation of the Effects of Reference Rate Reform on Financial Reporting”
(“ASU 2020-04”), which provides temporary, optional guidance to ease the potential burden of accounting for reference rate reform on financial reporting. ASU 2020-04 provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships and other transactions if certain criteria are met that reference LIBOR or
89
Renasant Corporation and Subsidiaries
Notes to Consolidated Financial Statements
Note 1 – Significant Accounting Policies (continued)
90
Renasant Corporation and Subsidiaries
Notes to Consolidated Financial Statements
Note 2 –
Securities
(In Thousands, Except Number of Securities)
The amortized cost and fair value of securities available for sale were as follows as of the dates presented:
|
Amortized
Cost |
Gross
Unrealized Gains |
Gross
Unrealized Losses |
Fair
Value |
||||||||||||||||||||
| December 31, 2020 | |||||||||||||||||||||||
| U.S. Treasury securities | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
| Obligations of other U.S. Government agencies and corporations |
|
|
|
|
|||||||||||||||||||
| Obligations of states and political subdivisions |
|
|
(
|
|
|||||||||||||||||||
| Residential mortgage backed securities: | |||||||||||||||||||||||
| Government agency mortgage backed securities |
|
|
(
|
|
|||||||||||||||||||
| Government agency collateralized mortgage obligations |
|
|
(
|
|
|||||||||||||||||||
| Commercial mortgage backed securities: | |||||||||||||||||||||||
| Government agency mortgage backed securities |
|
|
(
|
|
|||||||||||||||||||
| Government agency collateralized mortgage obligations |
|
|
(
|
|
|||||||||||||||||||
| Trust preferred securities |
|
|
(
|
|
|||||||||||||||||||
| Other debt securities |
|
|
(
|
|
|||||||||||||||||||
| $ |
|
$ |
|
$ |
(
|
$ |
|
||||||||||||||||
|
Amortized
Cost |
Gross
Unrealized Gains |
Gross
Unrealized Losses |
Fair
Value |
||||||||||||||||||||
| December 31, 2019 | |||||||||||||||||||||||
| U.S. Treasury securities | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
| Obligations of other U.S. Government agencies and corporations |
|
|
(
|
|
|||||||||||||||||||
| Obligations of states and political subdivisions |
|
|
(
|
|
|||||||||||||||||||
| Residential mortgage backed securities: | |||||||||||||||||||||||
| Government agency mortgage backed securities |
|
|
(
|
|
|||||||||||||||||||
| Government agency collateralized mortgage obligations |
|
|
(
|
|
|||||||||||||||||||
| Commercial mortgage backed securities: | |||||||||||||||||||||||
| Government agency mortgage backed securities |
|
|
(
|
|
|||||||||||||||||||
| Government agency collateralized mortgage obligations |
|
|
(
|
|
|||||||||||||||||||
| Trust preferred securities |
|
|
(
|
|
|||||||||||||||||||
| Other debt securities |
|
|
(
|
|
|||||||||||||||||||
| $ |
|
$ |
|
$ |
(
|
$ |
|
||||||||||||||||
91
Renasant Corporation and Subsidiaries
Notes to Consolidated Financial Statements
Note 2 – Securities (continued)
Securities sold were as follows for the periods presented:
| Carrying Value | Net Proceeds | Gain/(Loss) | |||||||||||||||
| Twelve months ended December 31, 2020 | |||||||||||||||||
| Obligations of states and political subdivisions | $ |
|
$ |
|
$ |
(
|
|||||||||||
| Residential mortgage backed securities: | |||||||||||||||||
| Government agency mortgage backed securities |
|
|
|
||||||||||||||
| Government agency collateralized mortgage obligations |
|
|
(
|
||||||||||||||
| $ |
|
$ |
|
$ |
|
||||||||||||
| Carrying Value | Net Proceeds | Gain/(Loss) | |||||||||||||||
| Twelve months ended December 31, 2019 | |||||||||||||||||
| Obligations of states and political subdivisions | $ |
|
$ |
|
$ |
|
|||||||||||
| Residential mortgage backed securities: | |||||||||||||||||
| Government agency mortgage backed securities |
|
|
(
|
||||||||||||||
| Government agency collateralized mortgage obligations |
|
|
(
|
||||||||||||||
| Commercial mortgage backed securities: | |||||||||||||||||
| Government agency collateralized mortgage obligations |
|
|
(
|
||||||||||||||
| Other debt securities |
|
|
|
||||||||||||||
| Other equity securities |
|
|
|
||||||||||||||
| $ |
|
$ |
|
$ |
|
||||||||||||
| Carrying Value | Net Proceeds | Loss | |||||||||||||||
| Twelve months ended December 31, 2018 | |||||||||||||||||
| Obligations of states and political subdivisions | $ |
|
$ |
|
$ |
(
|
|||||||||||
| Residential mortgage backed securities: | |||||||||||||||||
| Government agency mortgage backed securities |
|
|
(
|
||||||||||||||
| Government agency collateralized mortgage obligations |
|
|
(
|
||||||||||||||
| $ |
|
$ |
|
$ |
(
|
||||||||||||
The sales of other equity securities included in the table above for the twelve months ended December 31, 2019 represent the Company’s sale of its shares of Visa Class B common stock during the third quarter of 2019.
Gross realized gains and gross realized losses on sales of securities available for sale were as follows for the periods presented:
| Year Ended December 31, | |||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||
| Gross gains on sales of securities available for sale | $ |
|
$ |
|
$ |
|
|||||||||||
| Gross losses on sales of securities available for sale |
(
|
(
|
(
|
||||||||||||||
| Gain (losses) on sales of securities available for sale, net | $ |
|
$ |
|
$ |
(
|
|||||||||||
At December 31, 2020 and 2019, securities with a carrying value of approximately $
582,338
and $
416,849
, respectively, were pledged to secure government, public, trust, and other deposits. Securities with a carrying value of $
32,272
and $
27,754
were pledged as collateral for short-term borrowings and derivative instruments at December 31, 2020 and 2019, respectively.
92
Renasant Corporation and Subsidiaries
Notes to Consolidated Financial Statements
Note 2 – Securities (continued)
The amortized cost and fair value of securities at December 31, 2020 by contractual maturity are shown below. Expected maturities will differ from contractual maturities because issuers may call or prepay obligations with or without call or prepayment penalties.
| Available for Sale | ||||||||||||||
|
Amortized
Cost |
Fair
Value |
|||||||||||||
| Due within one year | $ |
|
$ |
|
||||||||||
| Due after one year through five years |
|
|
||||||||||||
| Due after five years through ten years |
|
|
||||||||||||
| Due after ten years |
|
|
||||||||||||
| Residential mortgage backed securities: | ||||||||||||||
| Government agency mortgage backed securities |
|
|
||||||||||||
| Government agency collateralized mortgage obligations |
|
|
||||||||||||
| Commercial mortgage backed securities: | ||||||||||||||
| Government agency mortgage backed securities |
|
|
||||||||||||
| Government agency collateralized mortgage obligations |
|
|
||||||||||||
| Other debt securities |
|
|
||||||||||||
| $ |
|
$ |
|
|||||||||||
93
Renasant Corporation and Subsidiaries
Notes to Consolidated Financial Statements
Note 2 – Securities (continued)
The following table presents the gross unrealized losses and fair value of investment securities, aggregated by investment category and the length of time the investments have been in a continuous unrealized loss position, as of the dates presented:
| Less than 12 Months | 12 Months or More | Total | |||||||||||||||||||||||||||||||||||||||||||||||||||
| # |
Fair
Value |
Unrealized
Losses |
# |
Fair
Value |
Unrealized
Losses |
# |
Fair
Value |
Unrealized
Losses |
|||||||||||||||||||||||||||||||||||||||||||||
| Available for Sale: | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| December 31, 2020 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Obligations of states and political subdivisions |
|
$ |
|
$ |
(
|
|
$ |
|
$ |
|
|
$ |
|
$ |
(
|
||||||||||||||||||||||||||||||||||||||
| Residential mortgage backed securities: | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Government agency mortgage backed securities |
|
|
(
|
|
|
|
|
|
(
|
||||||||||||||||||||||||||||||||||||||||||||
| Government agency collateralized mortgage obligations |
|
|
(
|
|
|
|
|
|
(
|
||||||||||||||||||||||||||||||||||||||||||||
| Commercial mortgage backed securities: | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Government agency mortgage backed securities |
|
|
(
|
|
|
|
|
|
(
|
||||||||||||||||||||||||||||||||||||||||||||
| Government agency collateralized mortgage obligations |
|
|
(
|
|
|
|
|
|
(
|
||||||||||||||||||||||||||||||||||||||||||||
| Trust preferred securities |
|
|
|
|
|
(
|
|
|
(
|
||||||||||||||||||||||||||||||||||||||||||||
| Other debt securities |
|
|
(
|
|
|
(
|
|
|
(
|
||||||||||||||||||||||||||||||||||||||||||||
| Total |
|
$ |
|
$ |
(
|
|
$ |
|
$ |
(
|
|
$ |
|
$ |
(
|
||||||||||||||||||||||||||||||||||||||
| December 31, 2019 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Obligations of other U.S. Government agencies and corporations |
|
$ |
|
$ |
|
|
$ |
|
$ |
(
|
|
$ |
|
$ |
(
|
||||||||||||||||||||||||||||||||||||||
| Obligations of states and political subdivisions |
|
|
(
|
|
|
|
|
|
(
|
||||||||||||||||||||||||||||||||||||||||||||
| Residential mortgage backed securities: | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Government agency mortgage backed securities |
|
|
(
|
|
|
(
|
|
|
(
|
||||||||||||||||||||||||||||||||||||||||||||
| Government agency collateralized mortgage obligations |
|
|
(
|
|
|
|
|
|
(
|
||||||||||||||||||||||||||||||||||||||||||||
| Commercial mortgage backed securities: | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Government agency mortgage backed securities |
|
|
(
|
|
|
(
|
|
|
(
|
||||||||||||||||||||||||||||||||||||||||||||
| Government agency collateralized mortgage obligations |
|
|
(
|
|
|
|
|
|
(
|
||||||||||||||||||||||||||||||||||||||||||||
| Trust preferred securities |
|
|
|
|
|
(
|
|
|
(
|
||||||||||||||||||||||||||||||||||||||||||||
| Other debt securities |
|
|
(
|
|
|
(
|
|
|
(
|
||||||||||||||||||||||||||||||||||||||||||||
| Total |
|
$ |
|
$ |
(
|
|
$ |
|
$ |
(
|
|
$ |
|
$ |
(
|
||||||||||||||||||||||||||||||||||||||
The Company does not intend to sell any of the securities in an unrealized loss position, and it is not more likely than not that the Company will be required to sell any such security prior to the recovery of its amortized cost basis, which may be maturity. Furthermore, even though a number of these securities have been in a continuous unrealized loss position for a period greater than twelve months, the Company is collecting principal and interest payments from the respective issuers as scheduled. As such, the Company did not record any impairment for the years ended December 31, 2020 and 2019 (determined in accordance with the accounting standards in effect prior to the Company’s adoption of CECL).
94
Renasant Corporation and Subsidiaries
Notes to Consolidated Financial Statements
Note 3 –
Non Purchased Loans
(In Thousands, Except Number of Loans)
“Purchased” loans are those loans acquired in any of the Company’s previous acquisitions, including FDIC-assisted acquisitions. “Non purchased” loans include all of the Company’s other loans, other than loans held for sale.
For purposes of this Note 3, all references to “loans” mean non purchased loans, including PPP loans.
The following is a summary of non purchased loans and leases at December 31:
| 2020 | 2019 | ||||||||||
| Commercial, financial, agricultural | $ |
|
$ |
|
|||||||
| Lease financing |
|
|
|||||||||
| Real estate – construction: | |||||||||||
| Residential |
|
|
|||||||||
| Commercial |
|
|
|||||||||
| Total real estate – construction |
|
|
|||||||||
| Real estate – 1-4 family mortgage: | |||||||||||
| Primary |
|
|
|||||||||
| Home equity |
|
|
|||||||||
| Rental/investment |
|
|
|||||||||
| Land development |
|
|
|||||||||
| Total real estate – 1-4 family mortgage |
|
|
|||||||||
| Real estate – commercial mortgage: | |||||||||||
| Owner-occupied |
|
|
|||||||||
| Non-owner occupied |
|
|
|||||||||
| Land development |
|
|
|||||||||
| Total real estate – commercial mortgage |
|
|
|||||||||
| Installment loans to individuals |
|
|
|||||||||
| Gross loans |
|
|
|||||||||
| Unearned income |
(
|
(
|
|||||||||
| Loans, net of unearned income | $ |
|
$ |
|
|||||||
95
Renasant Corporation and Subsidiaries
Notes to Consolidated Financial Statements
Note 3 – Non Purchased Loans (continued)
Past Due and Nonaccrual Loans
The following table provides an aging of past due and nonaccrual loans, segregated by class, as of the dates presented:
| Accruing Loans | Nonaccruing Loans | ||||||||||||||||||||||||||||
|
30-89 Days
Past Due |
90 Days
or More Past Due |
Current
Loans |
Total
Loans |
30-89 Days
Past Due |
90 Days
or More Past Due |
Current
Loans |
Total
Loans |
Total
Loans |
|||||||||||||||||||||
| December 31, 2020 | |||||||||||||||||||||||||||||
| Commercial, financial, agricultural | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||
| Lease financing |
|
|
|
|
|
|
|
|
|
||||||||||||||||||||
| Real estate – construction: | |||||||||||||||||||||||||||||
| Residential |
|
|
|
|
|
|
|
|
|
||||||||||||||||||||
| Commercial |
|
|
|
|
|
|
|
|
|
||||||||||||||||||||
| Total real estate – construction |
|
|
|
|
|
|
|
|
|
||||||||||||||||||||
| Real estate – 1-4 family mortgage: | |||||||||||||||||||||||||||||
| Primary |
|
|
|
|
|
|
|
|
|
||||||||||||||||||||
| Home equity |
|
|
|
|
|
|
|
|
|
||||||||||||||||||||
| Rental/investment |
|
|
|
|
|
|
|
|
|
||||||||||||||||||||
| Land development |
|
|
|
|
|
|
|
|
|
||||||||||||||||||||
| Total real estate – 1-4 family mortgage |
|
|
|
|
|
|
|
|
|
||||||||||||||||||||
| Real estate – commercial mortgage: | |||||||||||||||||||||||||||||
| Owner-occupied |
|
|
|
|
|
|
|
|
|
||||||||||||||||||||
| Non-owner occupied |
|
|
|
|
|
|
|
|
|
||||||||||||||||||||
| Land development |
|
|
|
|
|
|
|
|
|
||||||||||||||||||||
| Total real estate – commercial mortgage |
|
|
|
|
|
|
|
|
|
||||||||||||||||||||
| Installment loans to individuals |
|
|
|
|
|
|
|
|
|
||||||||||||||||||||
| Unearned income | — | — |
(
|
(
|
— | — | — |
|
(
|
||||||||||||||||||||
| Loans, net of unearned income | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||
| December 31, 2019 | |||||||||||||||||||||||||||||
| Commercial, financial, agricultural | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||
| Lease financing |
|
|
|
|
|
|
|
|
|
||||||||||||||||||||
| Real estate – construction |
|
|
|
|
|
|
|
|
|
||||||||||||||||||||
| Real estate – 1-4 family mortgage |
|
|
|
|
|
|
|
|
|
||||||||||||||||||||
| Real estate – commercial mortgage |
|
|
|
|
|
|
|
|
|
||||||||||||||||||||
| Installment loans to individuals |
|
|
|
|
|
|
|
|
|
||||||||||||||||||||
| Unearned income | — | — |
(
|
(
|
— | — | — | — |
(
|
||||||||||||||||||||
| Total | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||
Restructured loans that are not performing in accordance with their restructured terms that are either contractually
90
days or more past due or placed on nonaccrual status are reported as nonperforming loans. There were
two
restructured loans totaling $
177
that were contractually
90
days past due or more and still accruing at December 31, 2020. There were
two
restructured loans totaling $
164
that were contractually
90
days past due or more and still accruing at December 31, 2019. The outstanding balance of restructured loans on nonaccrual status was $
5,787
and $
3,058
at December 31, 2020 and 2019, respectively.
96
Renasant Corporation and Subsidiaries
Notes to Consolidated Financial Statements
Note 3 – Non Purchased Loans (continued)
Restructured Loans
At December 31, 2020, 2019 and 2018, there were $
11,761
, $
4,679
and $
5,325
, respectively, of restructured loans.
The following table illustrates the impact of modifications classified as restructured loans held on the Consolidated Balance Sheets and still performing in accordance with their restructured terms at period end, segregated by class, as of the periods presented.
|
Number of
Loans |
Pre-Modification
Outstanding Recorded Investment |
Post-Modification
Outstanding Recorded Investment |
|||||||||||||||
| December 31, 2020 | |||||||||||||||||
| Commercial, financial, agricultural |
|
|
|
||||||||||||||
| Real estate – 1-4 family mortgage: | |||||||||||||||||
| Primary |
|
|
|
||||||||||||||
| Rental/investment |
|
|
|
||||||||||||||
| Total real estate – 1-4 family mortgage |
|
|
|
||||||||||||||
| Real estate – commercial mortgage: | |||||||||||||||||
| Owner-occupied |
|
|
|
||||||||||||||
| Non-owner occupied |
|
|
|
||||||||||||||
| Land development |
|
|
|
||||||||||||||
| Total real estate – commercial mortgage |
|
|
|
||||||||||||||
| Installment loans to individuals |
|
|
|
||||||||||||||
| Total |
|
|
|
||||||||||||||
| December 31, 2019 | |||||||||||||||||
| Commercial, financial, agricultural |
|
$ |
|
$ |
|
||||||||||||
| Real estate – 1-4 family mortgage |
|
$ |
|
$ |
|
||||||||||||
| Total |
|
$ |
|
$ |
|
||||||||||||
| December 31, 2018 | |||||||||||||||||
| Real estate – 1-4 family mortgage |
|
|
|
||||||||||||||
| Real estate – commercial mortgage |
|
|
|
||||||||||||||
| Total |
|
$ |
|
$ |
|
||||||||||||
At December 31, 2020 and December 31, 2018 the Company had $
448
and $
139
, respectively, in troubled debt restructurings that subsequently defaulted within twelve months of the restructuring. There were no such occurrences for the year ended December 31, 2019 that remained outstanding at period end.
97
Renasant Corporation and Subsidiaries
Notes to Consolidated Financial Statements
Note 3 – Non Purchased Loans (continued)
Changes in the Company’s restructured loans are set forth in the table below.
|
Number of
Loans |
Recorded
Investment |
||||||||||
| Totals at January 1, 2019 |
|
$ |
|
||||||||
| Additional advances or loans with concessions |
|
|
|||||||||
| Reclassified as performing |
|
|
|||||||||
| Reductions due to: | |||||||||||
| Reclassified as nonperforming |
(
|
(
|
|||||||||
| Paid in full |
(
|
(
|
|||||||||
| Principal paydowns |
|
(
|
|||||||||
| Totals at December 31, 2019 |
|
$ |
|
||||||||
| Additional advances or loans with concessions |
|
|
|||||||||
| Reclassified as performing |
|
|
|||||||||
| Reductions due to: | |||||||||||
| Reclassified as nonperforming |
(
|
(
|
|||||||||
| Paid in full |
(
|
(
|
|||||||||
| Principal paydowns |
|
(
|
|||||||||
| Totals at December 31, 2020 |
|
$ |
|
||||||||
The allocated allowance for credit losses attributable to restructured loans was $
337
and $
125
at December 31, 2020 and 2019, respectively. The Company had
no
remaining availability under commitments to lend additional funds on these restructured loans at December 31, 2020 and December 31, 2019.
In response to the economic environment caused by the COVID-19 pandemic, the Company implemented a loan deferral program in the first quarter of 2020 to provide temporary payment relief to both consumer and commercial customers. Any customer current on loan payments, taxes and insurance is qualified for an initial
90
-day deferral of principal and interest payments. Principal and interest payments can be deferred for up to
180
days on residential mortgage loans. A second deferral is available to borrowers that remained current on taxes and insurance through the first deferral period and also satisfy underwriting standards established by the Company that analyze the ability of the borrower to service its loan in accordance with its existing terms in light of the impact of the COVID-19 pandemic on the borrower, its industry and the markets in which it operates. The Company’s loan deferral program complies with the guidance set forth in the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act and related guidance from the FDIC and other banking regulators. As of December 31, 2020, the Company had
622
loans with total balances of approximately $
112,000
on deferral. In accordance with the applicable guidance, none of these loans were considered “restructured loans.”
Credit Quality
For commercial purpose loans, internal risk-rating grades are assigned by lending, credit administration or loan review personnel, based on an analysis of the financial and collateral strength and other credit attributes underlying each loan. Management analyzes the resulting ratings, as well as other external statistics and factors such as delinquency, to track the migration performance of the portfolio balances of commercial and commercial real estate secured loans. Loan grades range between 1 and 9, with 1 being loans with the least credit risk. Loans within the “Pass” grade (historically, those with a risk rating between 1 and 4) generally have a lower risk of loss and therefore a lower risk factor applied to the loan balances. The “Pass” grade is reserved for loans with a risk rating between 1 and 4C. During the first quarter of 2020, the Company proactively identified certain “Pass” rated loans greater than $1,000 in industries the Company believed posed a greater risk in the current pandemic environment (at the time of the downgrade, borrowers in the hotel/motel, restaurant and entertainment industries) and created the risk rating of 4C. These were originally downgraded to “Pass-Watch” during the year as the Company reviewed these loans and its risk rating categories. After an extensive review, the Company determined that it was appropriate to classify 4B and 4C rated loans as “Pass”. The Company also determined that it would be appropriate to establish a “Special Mention” grade (those with a risk rating of 4E). This grade represents a loan where a significant adverse risk-modifying action is anticipated in the near term and left uncorrected, could result in deterioration of the credit quality of the loan. In 2019, the Company classified 4B and 4E rated loans as “Watch”, which was used on a temporary basis for “Pass”
98
Renasant Corporation and Subsidiaries
Notes to Consolidated Financial Statements
Note 3 – Non Purchased Loans (continued)
graded loans that required greater attention. Loans that migrate toward the “Substandard” grade (those with a risk rating between 5 and 9) generally have a higher risk of loss and therefore a higher risk factor applied to those related loan balances.
The following table presents the Company’s loan portfolio by year of origination and internal risk-rating grades as of the dates presented:
| Term Loans Amortized Cost Basis by Origination Year | |||||||||||||||||||||||||||||
| 2020 | 2019 | 2018 | 2017 | 2016 | Prior | Revolving Loans | Revolving Loans Converted to Term |
Total
Loans |
|||||||||||||||||||||
| December 31, 2020 | |||||||||||||||||||||||||||||
| Commercial, Financial, Agricultural | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||
| Pass |
|
|
|
|
|
|
|
|
|
||||||||||||||||||||
| Special Mention |
|
|
|
|
|
|
|
|
|
||||||||||||||||||||
| Substandard |
|
|
|
|
|
|
|
|
|
||||||||||||||||||||
| Real Estate - Construction | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||
| Residential | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||
| Pass |
|
|
|
|
|
|
|
|
|
||||||||||||||||||||
| Special Mention |
|
|
|
|
|
|
|
|
|
||||||||||||||||||||
| Substandard |
|
|
|
|
|
|
|
|
|
||||||||||||||||||||
| Commercial | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||
| Pass |
|
|
|
|
|
|
|
|
|
||||||||||||||||||||
| Special Mention |
|
|
|
|
|
|
|
|
|
||||||||||||||||||||
| Substandard |
|
|
|
|
|
|
|
|
|
||||||||||||||||||||
| Real Estate - 1-4 Family Mortgage | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||
| Primary | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||
| Pass |
|
|
|
|
|
|
|
|
|
||||||||||||||||||||
| Special Mention |
|
|
|
|
|
|
|
|
|
||||||||||||||||||||
| Substandard |
|
|
|
|
|
|
|
|
|
||||||||||||||||||||
| Home Equity | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||
| Pass |
|
|
|
|
|
|
|
|
|
||||||||||||||||||||
| Special Mention |
|
|
|
|
|
|
|
|
|
||||||||||||||||||||
| Substandard |
|
|
|
|
|
|
|
|
|
||||||||||||||||||||
| Rental/Investment | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||
| Pass |
|
|
|
|
|
|
|
|
|
||||||||||||||||||||
| Special Mention |
|
|
|
|
|
|
|
|
|
||||||||||||||||||||
| Substandard |
|
|
|
|
|
|
|
|
|
||||||||||||||||||||
| Land Development | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||
| Pass |
|
|
|
|
|
|
|
|
|
||||||||||||||||||||
| Special Mention |
|
|
|
|
|
|
|
|
|
||||||||||||||||||||
| Substandard |
|
|
|
|
|
|
|
|
|
||||||||||||||||||||
| Real Estate - Commercial Mortgage | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||
| Owner-Occupied | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||
| Pass |
|
|
|
|
|
|
|
|
|
||||||||||||||||||||
| Special Mention |
|
|
|
|
|
|
|
|
|
||||||||||||||||||||
| Substandard |
|
|
|
|
|
|
|
|
|
||||||||||||||||||||
| Non-Owner Occupied | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||
| Pass |
|
|
|
|
|
|
|
|
|
||||||||||||||||||||
| Special Mention |
|
|
|
|
|
|
|
|
|
||||||||||||||||||||
| Substandard |
|
|
|
|
|
|
|
|
|
||||||||||||||||||||
99
Renasant Corporation and Subsidiaries
Notes to Consolidated Financial Statements
Note 3 – Non Purchased Loans (continued)
| Term Loans Amortized Cost Basis by Origination Year | |||||||||||||||||||||||||||||
| 2020 | 2019 | 2018 | 2017 | 2016 | Prior | Revolving Loans | Revolving Loans Converted to Term |
Total
Loans |
|||||||||||||||||||||
| Land Development | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||
| Pass |
|
|
|
|
|
|
|
|
|
||||||||||||||||||||
| Special Mention |
|
|
|
|
|
|
|
|
|
||||||||||||||||||||
| Substandard |
|
|
|
|
|
|
|
|
|
||||||||||||||||||||
| Installment loans to individuals | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||
| Pass |
|
|
|
|
|
|
|
|
|
||||||||||||||||||||
| Special Mention |
|
|
|
|
|
|
|
|
|
||||||||||||||||||||
| Substandard |
|
|
|
|
|
|
|
|
|
||||||||||||||||||||
| Total loans subject to risk rating | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||
| Pass |
|
|
|
|
|
|
|
|
|
||||||||||||||||||||
| Special Mention |
|
|
|
|
|
|
|
|
|
||||||||||||||||||||
| Substandard |
|
|
|
|
|
|
|
|
|
||||||||||||||||||||
The following table presents the performing status of the Company’s loan portfolio not subject to risk rating as of the dates presented:
| Term Loans Amortized Cost Basis by Origination Year | |||||||||||||||||||||||||||||
| 2020 | 2019 | 2018 | 2017 | 2016 | Prior | Revolving Loans | Revolving Loans Converted to Term |
Total
Loans |
|||||||||||||||||||||
| December 31, 2020 | |||||||||||||||||||||||||||||
| Commercial, Financial, Agricultural | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||
| Performing Loans |
|
|
|
|
|
|
|
|
|
||||||||||||||||||||
| Non-Performing Loans |
|
|
|
|
|
|
|
|
|
||||||||||||||||||||
| Lease Financing Receivables | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||
| Performing Loans |
|
|
|
|
|
|
|
|
|
||||||||||||||||||||
| Non-Performing Loans |
|
|
|
|
|
|
|
|
|
||||||||||||||||||||
| Real Estate - Construction | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||
| Residential | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||
| Performing Loans |
|
|
|
|
|
|
|
|
|
||||||||||||||||||||
| Non-Performing Loans |
|
|
|
|
|
|
|
|
|
||||||||||||||||||||
| Commercial | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||
| Performing Loans |
|
|
|
|
|
|
|
|
|
||||||||||||||||||||
| Non-Performing Loans |
|
|
|
|
|
|
|
|
|
||||||||||||||||||||
100
Renasant Corporation and Subsidiaries
Notes to Consolidated Financial Statements
Note 3 – Non Purchased Loans (continued)
| Term Loans Amortized Cost Basis by Origination Year | |||||||||||||||||||||||||||||
| 2020 | 2019 | 2018 | 2017 | 2016 | Prior | Revolving Loans | Revolving Loans Converted to Term |
Total
Loans |
|||||||||||||||||||||
| Real Estate - 1-4 Family Mortgage | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||
| Primary | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||
| Performing Loans |
|
|
|
|
|
|
|
|
|
||||||||||||||||||||
| Non-Performing Loans |
|
|
|
|
|
|
|
|
|
||||||||||||||||||||
| Home Equity | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||
| Performing Loans |
|
|
|
|
|
|
|
|
|
||||||||||||||||||||
| Non-Performing Loans |
|
|
|
|
|
|
|
|
|
||||||||||||||||||||
| Rental/Investment | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||
| Performing Loans |
|
|
|
|
|
|
|
|
|
||||||||||||||||||||
| Non-Performing Loans |
|
|
|
|
|
|
|
|
|
||||||||||||||||||||
| Land Development | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||
| Performing Loans |
|
|
|
|
|
|
|
|
|
||||||||||||||||||||
| Non-Performing Loans |
|
|
|
|
|
|
|
|
|
||||||||||||||||||||
| Real Estate - Commercial Mortgage | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||
| Owner-Occupied | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||
| Performing Loans |
|
|
|
|
|
|
|
|
|
||||||||||||||||||||
| Non-Performing Loans |
|
|
|
|
|
|
|
|
|
||||||||||||||||||||
| Non-Owner Occupied | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||
| Performing Loans |
|
|
|
|
|
|
|
|
|
||||||||||||||||||||
| Non-Performing Loans |
|
|
|
|
|
|
|
|
|
||||||||||||||||||||
| Land Development | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||
| Performing Loans |
|
|
|
|
|
|
|
|
|
||||||||||||||||||||
| Non-Performing Loans |
|
|
|
|
|
|
|
|
|
||||||||||||||||||||
| Installment loans to individuals | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||
| Performing Loans |
|
|
|
|
|
|
|
|
|
||||||||||||||||||||
| Non-Performing Loans |
|
|
|
|
|
|
|
|
|
||||||||||||||||||||
| Total loans not subject to risk rating | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||
| Performing Loans |
|
|
|
|
|
|
|
|
|
||||||||||||||||||||
| Non-Performing Loans |
|
|
|
|
|
|
|
|
|
||||||||||||||||||||
The following disclosures are presented under GAAP in effect prior to the adoption of CECL. The Company has included these disclosures to address the applicable prior period.
| Pass | Watch | Substandard | Total | ||||||||||||||||||||
| December 31, 2019 | |||||||||||||||||||||||
| Commercial, financial, agricultural | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
| Real estate – construction |
|
|
|
|
|||||||||||||||||||
| Real estate – 1-4 family mortgage |
|
|
|
|
|||||||||||||||||||
| Real estate – commercial mortgage |
|
|
|
|
|||||||||||||||||||
| Installment loans to individuals |
|
|
|
|
|||||||||||||||||||
| Total | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
101
Renasant Corporation and Subsidiaries
Notes to Consolidated Financial Statements
Note 3 – Non Purchased Loans (continued)
The following table presents the performing status of the Company’s loan portfolio not subject to risk rating as of the dates presented:
| Performing | Non-Performing | Total | |||||||||||||||
| December 31, 2019 | |||||||||||||||||
| Commercial, financial, agricultural | $ |
|
$ |
|
$ |
|
|||||||||||
| Lease financing |
|
|
|
||||||||||||||
| Real estate – construction |
|
|
|
||||||||||||||
| Real estate – 1-4 family mortgage |
|
|
|
||||||||||||||
| Real estate – commercial mortgage |
|
|
|
||||||||||||||
| Installment loans to individuals |
|
|
|
||||||||||||||
| Total | $ |
|
$ |
|
$ |
|
|||||||||||
Related Party Loans
Certain executive officers and directors of Renasant Bank and their associates are customers of and have other transactions with Renasant Bank. Related party loans and commitments are made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with persons not related to the Company or the Bank and do not involve more than a normal risk of collectability or present other unfavorable features.
A summary of the changes in related party loans follows:
| Loans at December 31, 2019 | $ |
|
|||
| New loans and advances |
|
||||
| Payments received |
(
|
||||
| Changes in related parties |
|
||||
| Loans at December 31, 2020 | $ |
|
|||
No related party loans were classified as past due, nonaccrual, impaired or restructured at December 31, 2020 or 2019. Unfunded commitments to certain executive officers and directors and their associates totaled $
19,911
and $
7,266
at December 31, 2020 and 2019, respectively.
102
Renasant Corporation and Subsidiaries
Notes to Consolidated Financial Statements
Note 3 – Non Purchased Loans (continued)
The following disclosures are presented under GAAP in effect prior to the adoption of CECL that are no longer applicable or required. The Company has included these disclosures to address the applicable prior periods.
Impaired Loans
Impaired loans recognized in conformity with ASC 310, segregated by class, were as follows as of the dates and for the periods presented:
| As of December 31, 2019 | Year Ended December 31, 2019 | ||||||||||||||||||||||||||||
|
Recorded
Investment |
Unpaid
Principal Balance |
Related
Allowance |
Average
Recorded Investment |
Interest
Income Recognized |
|||||||||||||||||||||||||
| With a related allowance recorded: | |||||||||||||||||||||||||||||
| Commercial, financial, agricultural | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||||||
| Lease financing |
|
|
|
|
|
||||||||||||||||||||||||
| Real estate – construction |
|
|
|
|
|
||||||||||||||||||||||||
| Real estate – 1-4 family mortgage |
|
|
|
|
|
||||||||||||||||||||||||
| Real estate – commercial mortgage |
|
|
|
|
|
||||||||||||||||||||||||
| Installment loans to individuals |
|
|
|
|
|
||||||||||||||||||||||||
| Total | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||||||
| With no related allowance recorded: | |||||||||||||||||||||||||||||
| Commercial, financial, agricultural | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||||||
| Lease financing |
|
|
|
|
|
||||||||||||||||||||||||
| Real estate – construction |
|
|
|
|
|
||||||||||||||||||||||||
| Real estate – 1-4 family mortgage |
|
|
|
|
|
||||||||||||||||||||||||
| Real estate – commercial mortgage |
|
|
|
|
|
||||||||||||||||||||||||
| Installment loans to individuals |
|
|
|
|
|
||||||||||||||||||||||||
| Total | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||||||
| Totals | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||||||
The average recorded investment in impaired loans for the year ended December 31, 2018 was $
27,080
. Interest income recognized on impaired loans for the year ended December 31, 2018 was $
549
.
103
Renasant Corporation and Subsidiaries
Notes to Consolidated Financial Statements
Note 4 –
Purchased Loans
(In Thousands, Except Number of Loans)
For purposes of this Note 4, all references to “loans” mean purchased loans.
The following is a summary of purchased loans at December 31:
| 2020 | 2019 | ||||||||||
| Commercial, financial, agricultural | $ |
|
$ |
|
|||||||
| Real estate – construction: | |||||||||||
| Residential |
|
|
|||||||||
| Commercial |
|
|
|||||||||
| Total real estate – construction |
|
|
|||||||||
| Real estate – 1-4 family mortgage: | |||||||||||
| Primary |
|
|
|||||||||
| Home equity |
|
|
|||||||||
| Rental/investment |
|
|
|||||||||
| Land development |
|
|
|||||||||
| Total real estate – 1-4 family mortgage |
|
|
|||||||||
| Real estate – commercial mortgage: | |||||||||||
| Owner-occupied |
|
|
|||||||||
| Non-owner occupied |
|
|
|||||||||
| Land development |
|
|
|||||||||
| Total real estate – commercial mortgage |
|
|
|||||||||
| Installment loans to individuals |
|
|
|||||||||
| Loans | $ |
|
$ |
|
|||||||
104
Renasant Corporation and Subsidiaries
Notes to Consolidated Financial Statements
Note 4 – Purchased Loans (continued)
Past Due and Nonaccrual Loans
The following table provides an aging of past due and nonaccrual loans, segregated by class, as of the dates presented:
| Accruing Loans | Nonaccruing Loans | ||||||||||||||||||||||||||||
|
30-89 Days
Past Due |
90 Days
or More Past Due |
Current
Loans |
Total
Loans |
30-89 Days
Past Due |
90 Days
or More Past Due |
Current
Loans |
Total
Loans |
Total
Loans |
|||||||||||||||||||||
| December 31, 2020 | |||||||||||||||||||||||||||||
| Commercial, financial, agricultural | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||
| Real estate – construction: | |||||||||||||||||||||||||||||
| Residential |
|
|
|
|
|
|
|
|
|
||||||||||||||||||||
| Commercial |
|
|
|
|
|
|
|
|
|
||||||||||||||||||||
| Total real estate – construction |
|
|
|
|
|
|
|
|
|
||||||||||||||||||||
| Real estate – 1-4 family mortgage: | |||||||||||||||||||||||||||||
| Primary |
|
|
|
|
|
|
|
|
|
||||||||||||||||||||
| Home equity |
|
|
|
|
|
|
|
|
|
||||||||||||||||||||
| Rental/investment |
|
|
|
|
|
|
|
|
|
||||||||||||||||||||
| Land development |
|
|
|
|
|
|
|
|
|
||||||||||||||||||||
| Total real estate – 1-4 family mortgage |
|
|
|
|
|
|
|
|
|
||||||||||||||||||||
| Real estate – commercial mortgage: | |||||||||||||||||||||||||||||
| Owner-occupied |
|
|
|
|
|
|
|
|
|
||||||||||||||||||||
| Non-owner occupied |
|
|
|
|
|
|
|
|
|
||||||||||||||||||||
| Land development |
|
|
|
|
|
|
|
|
|
||||||||||||||||||||
| Total real estate – commercial mortgage |
|
|
|
|
|
|
|
|
|
||||||||||||||||||||
| Installment loans to individuals |
|
|
|
|
|
|
|
|
|
||||||||||||||||||||
| Loans, net of unearned income | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||
| December 31, 2019 | |||||||||||||||||||||||||||||
| Commercial, financial, agricultural | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||
| Real estate – construction |
|
|
|
|
|
|
|
|
|
||||||||||||||||||||
| Real estate – 1-4 family mortgage |
|
|
|
|
|
|
|
|
|
||||||||||||||||||||
| Real estate – commercial mortgage |
|
|
|
|
|
|
|
|
|
||||||||||||||||||||
| Installment loans to individuals |
|
|
|
|
|
|
|
|
|
||||||||||||||||||||
| Total | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||
Restructured loans that are not performing in accordance with their restructured terms that are either contractually
90
days or more past due or placed on nonaccrual status are reported as nonperforming loans. There was
one
restructured loan totaling $
74
that was contractually
90
days past due or more and still accruing at December 31, 2020. There were
two
restructured loans totaling $
106
that were contractually
90
days past due or more and still accruing at December 31, 2019. The outstanding balance of restructured loans on nonaccrual status was $
12,788
and $
1,667
at December 31, 2020 and 2019, respectively.
105
Renasant Corporation and Subsidiaries
Notes to Consolidated Financial Statements
Note 4 – Purchased Loans (continued)
Restructured Loans
At December 31, 2020, 2019 and 2018, there were $
8,687
, $
7,275
and $
7,495
, respectively, of restructured loans.
The following table illustrates the impact of modifications classified as restructured loans held on the Consolidated Balance Sheets and still performing in accordance with their restructured terms at period end, segregated by class, as of the periods presented.
|
Number of
Loans |
Pre-Modification
Outstanding Recorded Investment |
Post-Modification
Outstanding Recorded Investment |
|||||||||||||||
| December 31, 2020 | |||||||||||||||||
| Commercial, financial, agricultural |
|
$ |
|
$ |
|
||||||||||||
| Real estate – 1-4 family mortgage: | |||||||||||||||||
| Primary |
|
|
|
||||||||||||||
| Home equity |
|
|
|
||||||||||||||
| Total real estate – 1-4 family mortgage |
|
|
|
||||||||||||||
| Real estate – commercial mortgage: | |||||||||||||||||
| Owner-occupied |
|
|
|
||||||||||||||
| Non-owner occupied |
|
|
|
||||||||||||||
| Total real estate – commercial mortgage |
|
|
|
||||||||||||||
| Installment loans to individuals |
|
|
|
||||||||||||||
| Total |
|
$ |
|
$ |
|
||||||||||||
| December 31, 2019 | |||||||||||||||||
| Commercial, financial, agricultural |
|
$ |
|
$ |
|
||||||||||||
| Real estate – 1-4 family mortgage |
|
|
|
||||||||||||||
| Real estate – commercial mortgage |
|
|
|
||||||||||||||
| Total |
|
$ |
|
$ |
|
||||||||||||
| December 31, 2018 | |||||||||||||||||
| Commercial, financial, agricultural |
|
$ |
|
$ |
|
||||||||||||
| Real estate – 1-4 family mortgage |
|
|
|
||||||||||||||
| Real estate – commercial mortgage |
|
|
|
||||||||||||||
| Total |
|
$ |
|
$ |
|
||||||||||||
106
Renasant Corporation and Subsidiaries
Notes to Consolidated Financial Statements
Note 4 – Purchased Loans (continued)
Changes in the Company’s restructured loans are set forth in the table below.
|
Number of
Loans |
Recorded
Investment |
||||||||||
| Totals at January 1, 2019 |
|
$ |
|
||||||||
| Additional advances or loans with concessions |
|
|
|||||||||
| Reclassified as performing |
|
|
|||||||||
| Reductions due to: | |||||||||||
| Reclassified as nonperforming |
(
|
(
|
|||||||||
| Paid in full |
(
|
(
|
|||||||||
| Charge-offs |
(
|
(
|
|||||||||
| Principal paydowns |
|
(
|
|||||||||
| Measurement period adjustment on recently acquired loans |
|
(
|
|||||||||
| Totals at December 31, 2019 |
|
$ |
|
||||||||
| Additional advances or loans with concessions |
|
|
|||||||||
| Reclassified as performing |
|
|
|||||||||
| Reductions due to: | |||||||||||
| Reclassified as nonperforming |
(
|
(
|
|||||||||
| Paid in full |
(
|
(
|
|||||||||
| Charge-offs |
(
|
(
|
|||||||||
| Principal paydowns |
|
(
|
|||||||||
| Totals at December 31, 2020 |
|
$ |
|
||||||||
The allocated allowance for credit losses attributable to restructured loans was $
612
and $
17
at December 31, 2020 and 2019, respectively. The Company had $
370
and $
6
in remaining availability under commitments to lend additional funds on these restructured loans at December 31, 2020 and 2019, respectively.
As discussed in Note 3, “Non Purchased Loans,” the Company implemented a loan deferral program in response to the COVID-19 pandemic. As of December 31, 2020, the Company had
284
loans with total balances of approximately $
33,000
on deferral. Under the applicable guidance, none of these loans were considered “restructured loans.”
Credit Quality
A discussion of the Company’s policies regarding internal risk-rating of loans is discussed above in Note 3, “Non Purchased Loans.”
The following table presents the Company’s loan portfolio by year of origination and internal risk-rating grades as of the dates presented:
| Term Loans Amortized Cost Basis by Origination Year | |||||||||||||||||||||||||||||
| 2020 | 2019 | 2018 | 2017 | 2016 | Prior | Revolving Loans | Revolving Loans Converted to Term |
Total
Loans |
|||||||||||||||||||||
| December 31, 2020 | |||||||||||||||||||||||||||||
| Commercial, Financial, Agricultural | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||
| Pass |
|
|
|
|
|
|
|
|
|
||||||||||||||||||||
| Special Mention |
|
|
|
|
|
|
|
|
|
||||||||||||||||||||
| Substandard |
|
|
|
|
|
|
|
|
|
||||||||||||||||||||
| Real Estate - Construction | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||
| Residential | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||
| Pass |
|
|
|
|
|
|
|
|
|
||||||||||||||||||||
| Special Mention |
|
|
|
|
|
|
|
|
|
||||||||||||||||||||
| Substandard |
|
|
|
|
|
|
|
|
|
||||||||||||||||||||
107
Renasant Corporation and Subsidiaries
Notes to Consolidated Financial Statements
Note 4 – Purchased Loans (continued)
| Term Loans Amortized Cost Basis by Origination Year | |||||||||||||||||||||||||||||
| 2020 | 2019 | 2018 | 2017 | 2016 | Prior | Revolving Loans | Revolving Loans Converted to Term |
Total
Loans |
|||||||||||||||||||||
| Commercial | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||
| Pass |
|
|
|
|
|
|
|
|
|
||||||||||||||||||||
| Special Mention |
|
|
|
|
|
|
|
|
|
||||||||||||||||||||
| Substandard |
|
|
|
|
|
|
|
|
|
||||||||||||||||||||
| Real Estate - 1-4 Family Mortgage | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||
| Primary | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||
| Pass |
|
|
|
|
|
|
|
|
|
||||||||||||||||||||
| Special Mention |
|
|
|
|
|
|
|
|
|
||||||||||||||||||||
| Substandard |
|
|
|
|
|
|
|
|
|
||||||||||||||||||||
| Home Equity | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||
| Pass |
|
|
|
|
|
|
|
|
|
||||||||||||||||||||
| Special Mention |
|
|
|
|
|
|
|
|
|
||||||||||||||||||||
| Substandard |
|
|
|
|
|
|
|
|
|
||||||||||||||||||||
| Rental/Investment | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||
| Pass |
|
|
|
|
|
|
|
|
|
||||||||||||||||||||
| Special Mention |
|
|
|
|
|
|
|
|
|
||||||||||||||||||||
| Substandard |
|
|
|
|
|
|
|
|
|
||||||||||||||||||||
| Land Development | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||
| Pass |
|
|
|
|
|
|
|
|
|
||||||||||||||||||||
| Special Mention |
|
|
|
|
|
|
|
|
|
||||||||||||||||||||
| Substandard |
|
|
|
|
|
|
|
|
|
||||||||||||||||||||
| Real Estate - Commercial Mortgage | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||
| Owner-Occupied | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||
| Pass |
|
|
|
|
|
|
|
|
|
||||||||||||||||||||
| Special Mention |
|
|
|
|
|
|
|
|
|
||||||||||||||||||||
| Substandard |
|
|
|
|
|
|
|
|
|
||||||||||||||||||||
| Non-Owner Occupied | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||
| Pass |
|
|
|
|
|
|
|
|
|
||||||||||||||||||||
| Special Mention |
|
|
|
|
|
|
|
|
|
||||||||||||||||||||
| Substandard |
|
|
|
|
|
|
|
|
|
||||||||||||||||||||
| Land Development | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||
| Pass |
|
|
|
|
|
|
|
|
|
||||||||||||||||||||
| Special Mention |
|
|
|
|
|
|
|
|
|
||||||||||||||||||||
| Substandard |
|
|
|
|
|
|
|
|
|
||||||||||||||||||||
| Installment loans to individuals | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||
| Pass |
|
|
|
|
|
|
|
|
|
||||||||||||||||||||
| Special Mention |
|
|
|
|
|
|
|
|
|
||||||||||||||||||||
| Substandard |
|
|
|
|
|
|
|
|
|
||||||||||||||||||||
| Total loans subject to risk rating | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||
| Pass |
|
|
|
|
|
|
|
|
|
||||||||||||||||||||
| Special Mention |
|
|
|
|
|
|
|
|
|
||||||||||||||||||||
| Substandard |
|
|
|
|
|
|
|
|
|
||||||||||||||||||||
108
Renasant Corporation and Subsidiaries
Notes to Consolidated Financial Statements
Note 4 – Purchased Loans (continued)
The following table presents the performing status of the Company’s loan portfolio not subject to risk rating as of the dates presented:
| Term Loans Amortized Cost Basis by Origination Year | |||||||||||||||||||||||||||||
| 2020 | 2019 | 2018 | 2017 | 2016 | Prior | Revolving Loans | Revolving Loans Converted to Term |
Total
Loans |
|||||||||||||||||||||
| December 31, 2020 | |||||||||||||||||||||||||||||
| Commercial, Financial, Agricultural | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||
| Performing Loans |
|
|
|
|
|
|
|
|
|
||||||||||||||||||||
| Non-Performing Loans |
|
|
|
|
|
|
|
|
|
||||||||||||||||||||
| Real Estate - Construction | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||
| Residential | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||
| Performing Loans |
|
|
|
|
|
|
|
|
|
||||||||||||||||||||
| Non-Performing Loans |
|
|
|
|
|
|
|
|
|
||||||||||||||||||||
| Commercial | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||
| Performing Loans |
|
|
|
|
|
|
|
|
|
||||||||||||||||||||
| Non-Performing Loans |
|
|
|
|
|
|
|
|
|
||||||||||||||||||||
| Real Estate - 1-4 Family Mortgage | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||
| Primary | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||
| Performing Loans |
|
|
|
|
|
|
|
|
|
||||||||||||||||||||
| Non-Performing Loans |
|
|
|
|
|
|
|
|
|
||||||||||||||||||||
| Home Equity | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||
| Performing Loans |
|
|
|
|
|
|
|
|
|
||||||||||||||||||||
| Non-Performing Loans |
|
|
|
|
|
|
|
|
|
||||||||||||||||||||
| Rental/Investment | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||
| Performing Loans |
|
|
|
|
|
|
|
|
|
||||||||||||||||||||
| Non-Performing Loans |
|
|
|
|
|
|
|
|
|
||||||||||||||||||||
| Land Development | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||
| Performing Loans |
|
|
|
|
|
|
|
|
|
||||||||||||||||||||
| Non-Performing Loans |
|
|
|
|
|
|
|
|
|
||||||||||||||||||||
| Real Estate - Commercial Mortgage | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||
| Owner-Occupied | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||
| Performing Loans |
|
|
|
|
|
|
|
|
|
||||||||||||||||||||
| Non-Performing Loans |
|
|
|
|
|
|
|
|
|
||||||||||||||||||||
| Non-Owner Occupied | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||
| Performing Loans |
|
|
|
|
|
|
|
|
|
||||||||||||||||||||
| Non-Performing Loans |
|
|
|
|
|
|
|
|
|
||||||||||||||||||||
| Land Development | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||
| Performing Loans |
|
|
|
|
|
|
|
|
|
||||||||||||||||||||
| Non-Performing Loans |
|
|
|
|
|
|
|
|
|
||||||||||||||||||||
| Installment loans to individuals | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||
| Performing Loans |
|
|
|
|
|
|
|
|
|
||||||||||||||||||||
| Non-Performing Loans |
|
|
|
|
|
|
|
|
|
||||||||||||||||||||
| Total loans not subject to risk rating | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||
| Performing Loans |
|
|
|
|
|
|
|
|
|
||||||||||||||||||||
| Non-Performing Loans |
|
|
|
|
|
|
|
|
|
||||||||||||||||||||
109
Renasant Corporation and Subsidiaries
Notes to Consolidated Financial Statements
Note 4 – Purchased Loans (continued)
The following disclosures are presented under GAAP in effect prior to the adoption of CECL. The Company has included these disclosures to address the applicable prior period.
The following table presents the Company’s loan portfolio by risk-rating grades as of the dates presented:
| Pass | Watch | Substandard | Total | ||||||||||||||||||||
| December 31, 2019 | |||||||||||||||||||||||
| Commercial, financial, agricultural | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
| Real estate – construction |
|
|
|
|
|||||||||||||||||||
| Real estate – 1-4 family mortgage |
|
|
|
|
|||||||||||||||||||
| Real estate – commercial mortgage |
|
|
|
|
|||||||||||||||||||
| Installment loans to individuals |
|
|
|
|
|||||||||||||||||||
| Total | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
The following table presents the performing status of the Company’s loan portfolio not subject to risk rating as of the dates presented:
| Performing | Non-Performing | Total | |||||||||||||||
| December 31, 2019 | |||||||||||||||||
| Commercial, financial, agricultural | $ |
|
$ |
|
$ |
|
|||||||||||
| Real estate – construction |
|
|
|
||||||||||||||
| Real estate – 1-4 family mortgage |
|
|
|
||||||||||||||
| Real estate – commercial mortgage |
|
|
|
||||||||||||||
| Installment loans to individuals |
|
|
|
||||||||||||||
| Total | $ |
|
$ |
|
$ |
|
|||||||||||
110
Renasant Corporation and Subsidiaries
Notes to Consolidated Financial Statements
Note 4 – Purchased Loans (continued)
Impaired Loans
Non credit deteriorated loans that were subsequently impaired and recognized in conformity with ASC 310, segregated by class, were as follows as of the dates and for the periods presented:
| As of December 31, 2019 | Year Ended December 31, 2019 | ||||||||||||||||||||||||||||
|
Recorded
Investment |
Unpaid
Principal Balance |
Related
Allowance |
Average
Recorded Investment |
Interest
Income Recognized |
|||||||||||||||||||||||||
| With a related allowance recorded: | |||||||||||||||||||||||||||||
| Commercial, financial, agricultural | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||||||
| Real estate – construction |
|
|
|
|
|
||||||||||||||||||||||||
| Real estate – 1-4 family mortgage |
|
|
|
|
|
||||||||||||||||||||||||
| Real estate – commercial mortgage |
|
|
|
|
|
||||||||||||||||||||||||
| Installment loans to individuals |
|
|
|
|
|
||||||||||||||||||||||||
| Total | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||||||
| With no related allowance recorded: | |||||||||||||||||||||||||||||
| Commercial, financial, agricultural | $ |
|
$ |
|
$ | — | $ |
|
$ |
|
|||||||||||||||||||
| Real estate – construction |
|
|
— |
|
|
||||||||||||||||||||||||
| Real estate – 1-4 family mortgage |
|
|
— |
|
|
||||||||||||||||||||||||
| Real estate – commercial mortgage |
|
|
— |
|
|
||||||||||||||||||||||||
| Installment loans to individuals |
|
|
— |
|
|
||||||||||||||||||||||||
| Total | $ |
|
$ |
|
$ | — | $ |
|
$ |
|
|||||||||||||||||||
| Totals | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||||||
The average recorded investment in non credit deteriorated loans that were subsequently impaired for the year ended December 31, 2018 was $
9,396
. Interest income recognized on non credit deteriorated loans that were subsequently impaired for the year ended December 31, 2018 was $
194
.
111
Renasant Corporation and Subsidiaries
Notes to Consolidated Financial Statements
Note 4 – Purchased Loans (continued)
Credit deteriorated loans recognized in conformity with ASC 310-30, segregated by class, were as follows as of the dates and for the periods presented:
| As of December 31, 2019 | Year Ended December 31, 2019 | ||||||||||||||||||||||||||||
|
Recorded
Investment |
Unpaid
Principal Balance |
Related
Allowance |
Average
Recorded Investment |
Interest
Income Recognized |
|||||||||||||||||||||||||
| With a related allowance recorded: | |||||||||||||||||||||||||||||
| Commercial, financial, agricultural | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||||||
| Real estate – construction |
|
|
|
|
|
||||||||||||||||||||||||
| Real estate – 1-4 family mortgage |
|
|
|
|
|
||||||||||||||||||||||||
| Real estate – commercial mortgage |
|
|
|
|
|
||||||||||||||||||||||||
| Installment loans to individuals |
|
|
|
|
|
||||||||||||||||||||||||
| Total | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||||||
| With no related allowance recorded: | |||||||||||||||||||||||||||||
| Commercial, financial, agricultural | $ |
|
$ |
|
$ | — | $ |
|
$ |
|
|||||||||||||||||||
| Real estate – construction |
|
|
— |
|
|
||||||||||||||||||||||||
| Real estate – 1-4 family mortgage |
|
|
— |
|
|
||||||||||||||||||||||||
| Real estate – commercial mortgage |
|
|
— |
|
|
||||||||||||||||||||||||
| Installment loans to individuals |
|
|
— |
|
|
||||||||||||||||||||||||
| Total | $ |
|
$ |
|
$ | — | $ |
|
$ |
|
|||||||||||||||||||
| Totals | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||||||
The average recorded investment in credit-deteriorated loans for the year ended December 31, 2018 was $
212,967
. Interest income recognized on credit-deteriorated loans for the year ended December 31, 2018 was $
10,084
.
Loans Purchased with Deteriorated Credit Quality
Loans purchased in business combinations that exhibited, at the date of acquisition, evidence of deterioration of the credit quality since origination, such that it was probable that all contractually required payments would not be collected, were as follows as of the dates presented:
| Total Purchased Credit Deteriorated Loans | |||||
| December 31, 2019 | |||||
| Commercial, financial, agricultural | $ |
|
|||
| Real estate – construction |
|
||||
| Real estate – 1-4 family mortgage |
|
||||
| Real estate – commercial mortgage |
|
||||
| Installment loans to individuals |
|
||||
| Total | $ |
|
|||
112
Renasant Corporation and Subsidiaries
Notes to Consolidated Financial Statements
Note 4 – Purchased Loans (continued)
The following table presents the fair value of loans recognized in accordance with ASC 310-30 at the time of acquisition:
| Total Purchased Credit Deteriorated Loans | |||||
| December 31, 2019 | |||||
| Contractually-required principal and interest | $ |
|
|||
|
Nonaccretable difference
(1)
|
(
|
||||
| Cash flows expected to be collected |
|
||||
|
Accretable yield
(2)
|
(
|
||||
| Fair value | $ |
|
|||
(1)
Represents contractual principal cash flows of $
44,115
and interest cash flows of $
6,972
not expected to be collected.
113
Renasant Corporation and Subsidiaries
Notes to Consolidated Financial Statements
Note 5 –
Allowance for Credit Losses
(In Thousands, Except Number of Loans)
The following is a summary of non purchased and purchased loans and leases at December 31:
| 2020 | 2019 | ||||||||||
| Commercial, financial, agricultural | $ |
|
$ |
|
|||||||
| Lease financing |
|
|
|||||||||
| Real estate – construction: | |||||||||||
| Residential |
|
|
|||||||||
| Commercial |
|
|
|||||||||
| Total real estate – construction |
|
|
|||||||||
| Real estate – 1-4 family mortgage: | |||||||||||
| Primary |
|
|
|||||||||
| Home equity |
|
|
|||||||||
| Rental/investment |
|
|
|||||||||
| Land development |
|
|
|||||||||
| Total real estate – 1-4 family mortgage |
|
|
|||||||||
| Real estate – commercial mortgage: | |||||||||||
| Owner-occupied |
|
|
|||||||||
| Non-owner occupied |
|
|
|||||||||
| Land development |
|
|
|||||||||
| Total real estate – commercial mortgage |
|
|
|||||||||
| Installment loans to individuals |
|
|
|||||||||
| Gross loans |
|
|
|||||||||
| Unearned income |
(
|
(
|
|||||||||
| Loans, net of unearned income |
|
|
|||||||||
| Allowance for credit losses on loans |
(
|
(
|
|||||||||
| Net loans | $ |
|
$ |
|
|||||||
114
Renasant Corporation and Subsidiaries
Notes to Consolidated Financial Statements
Note 5 – Allowance for Credit Losses (continued)
Allowance for Credit Losses on Loans
The following table provides a roll-forward of the allowance for credit losses by loan category and a breakdown of the ending balance of the allowance based on the Company’s credit loss methodology for the periods presented:
| Commercial |
Real Estate -
Construction |
Real Estate -
1-4 Family Mortgage |
Real Estate -
Commercial Mortgage |
Lease Financing | Installment Loans to Individuals | Total | |||||||||||||||||||||||||||||||||||
| Year Ended December 31, 2020 | |||||||||||||||||||||||||||||||||||||||||
| Allowance for credit losses on loans: | |||||||||||||||||||||||||||||||||||||||||
| Beginning balance | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
||||||||||||||||||||||||||||||||||
| Charge-offs |
(
|
(
|
(
|
(
|
(
|
(
|
(
|
||||||||||||||||||||||||||||||||||
| Recoveries |
|
|
|
|
|
|
|
||||||||||||||||||||||||||||||||||
| Net charge-offs |
(
|
(
|
(
|
(
|
(
|
(
|
(
|
||||||||||||||||||||||||||||||||||
| Provision for credit losses on loans |
|
|
|
|
|
|
|
||||||||||||||||||||||||||||||||||
| Ending balance | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||||||||||||||
| Period-End Amount Allocated to: | |||||||||||||||||||||||||||||||||||||||||
| Individually evaluated | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||||||||||||||
| Collectively evaluated |
|
|
|
|
|
|
|
||||||||||||||||||||||||||||||||||
| Ending balance | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||||||||||||||
| Loans: | |||||||||||||||||||||||||||||||||||||||||
| Individually evaluated | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||||||||||||||
| Collectively evaluated |
|
|
|
|
|
|
|
||||||||||||||||||||||||||||||||||
| Ending balance | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||||||||||||||
| Nonaccruing loans with no allowance for credit losses | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||||||||||||||
Upon adoption of ASC 326 on January 1, 2020, the allowance for credit losses on loans was increased by $
42,484
. The Company recorded $
85,350
in total provision for credit losses on loans during 2020. The provision recorded during the year was primarily driven by the current and future economic uncertainty caused by the COVID-19 pandemic, including the current projections of an improving, but continued elevated national unemployment rate into 2021 and 2022 and nominal GDP growth relative to pre-pandemic levels. The Company also factored into its estimate the potential benefit and risk of participation in the government programs implemented through the CARES Act and the internal loan deferral program offered to qualified customers. The Company utilized a two year reasonable and supportable forecast range during the current period. The Company continues its heightened monitoring efforts with respect to loans in certain industries the Company currently believes pose a greater risk in the current environment (i.e., hospitality and healthcare). In addition, the Company will continue to monitor the performance of all portfolios, the severity and duration of the pandemic and potential subsequent recovery of the economic environment.
Although the Company made an accounting policy election to exclude accrued interest from the amortized cost of loans and therefore the allowance calculation, the Company recorded $
1,500
in provision for credit losses to establish an allowance for the interest deferred as part of the loan deferral program.
115
Renasant Corporation and Subsidiaries
Notes to Consolidated Financial Statements
Note 5 – Allowance for Credit Losses (continued)
The following table provides a roll-forward of the allowance for credit losses by loan category and a breakdown of the ending balance of the allowance based on the Company’s credit loss methodology prior to the adoption of ASC 326 for the periods presented:
| Commercial |
Real Estate -
Construction |
Real Estate -
1-4 Family Mortgage |
Real Estate -
Commercial Mortgage |
Installment
and Other
(1)
|
Total | ||||||||||||||||||||||||||||||
| Year Ended December 31, 2019 | |||||||||||||||||||||||||||||||||||
| Allowance for loan losses: | |||||||||||||||||||||||||||||||||||
| Beginning balance | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||||||||||
| Charge-offs |
(
|
|
(
|
(
|
(
|
(
|
|||||||||||||||||||||||||||||
| Recoveries |
|
|
|
|
|
|
|||||||||||||||||||||||||||||
| Net charge-offs |
(
|
|
(
|
(
|
(
|
(
|
|||||||||||||||||||||||||||||
| Provision for loan losses |
|
|
|
|
|
|
|||||||||||||||||||||||||||||
| Ending balance | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||||||||||
| Period-End Amount Allocated to: | |||||||||||||||||||||||||||||||||||
| Individually evaluated for impairment | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||||||||||
| Collectively evaluated for impairment |
|
|
|
|
|
|
|||||||||||||||||||||||||||||
| Purchased with deteriorated credit quality |
|
|
|
|
|
|
|||||||||||||||||||||||||||||
| Ending balance | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||||||||||
| Year Ended December 31, 2018 | |||||||||||||||||||||||||||||||||||
| Allowance for loan losses: | |||||||||||||||||||||||||||||||||||
| Beginning balance | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||||||||||
| Charge-offs |
(
|
(
|
(
|
(
|
(
|
(
|
|||||||||||||||||||||||||||||
| Recoveries |
|
|
|
|
|
|
|||||||||||||||||||||||||||||
| Net charge-offs |
(
|
(
|
(
|
(
|
(
|
(
|
|||||||||||||||||||||||||||||
| Provision for loan losses |
|
|
(
|
|
|
|
|||||||||||||||||||||||||||||
| Ending balance | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||||||||||
| Period-End Amount Allocated to: | |||||||||||||||||||||||||||||||||||
| Individually evaluated for impairment | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||||||||||
| Collectively evaluated for impairment |
|
|
|
|
|
|
|||||||||||||||||||||||||||||
| Purchased with deteriorated credit quality |
|
|
|
|
|
|
|||||||||||||||||||||||||||||
| Ending balance | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||||||||||
(1)
Includes lease financing receivables.
116
Renasant Corporation and Subsidiaries
Notes to Consolidated Financial Statements
Note 5 – Allowance for Credit Losses (continued)
The following table provides the recorded investment in loans, net of unearned income, based on the Company’s impairment methodology as of the dates presented:
| Commercial |
Real Estate -
Construction |
Real Estate -
1-4 Family Mortgage |
Real Estate -
Commercial Mortgage |
Installment
and Other
(1)
|
Total | ||||||||||||||||||||||||||||||
| December 31, 2019 | |||||||||||||||||||||||||||||||||||
| Individually evaluated for impairment | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||||||||||
| Collectively evaluated for impairment |
|
|
|
|
|
|
|||||||||||||||||||||||||||||
| Acquired with deteriorated credit quality |
|
|
|
|
|
|
|||||||||||||||||||||||||||||
| Ending balance | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||||||||||
(1)
Includes lease financing receivables.
Allowance for Credit Losses on Unfunded Loan Commitments
The following table provides a roll-forward of the allowance for credit losses on unfunded loan commitments for the period presented.
| Year Ended December 31, 2020 | |||||
| Allowance for credit losses on unfunded loan commitments: | |||||
| Beginning balance | $ |
|
|||
|
Impact of the adoption of
|
|
||||
| Provision for credit losses on unfunded loan commitments (included in other noninterest expense) |
|
||||
| Ending balance | $ |
|
|||
Note 6 –
Premises and Equipment
(In Thousands)
Bank premises and equipment at December 31 are summarized as follows:
| 2020 | 2019 | ||||||||||
| Premises | $ |
|
$ |
|
|||||||
| Leasehold improvements |
|
|
|||||||||
| Furniture and equipment |
|
|
|||||||||
| Computer equipment |
|
|
|||||||||
| Autos |
|
|
|||||||||
| Lease right-of-use assets |
|
|
|||||||||
| Total |
|
|
|||||||||
| Accumulated depreciation |
(
|
(
|
|||||||||
| Net | $ |
|
$ |
|
|||||||
Depreciation expense was $
18,699
, $
16,379
and $
14,358
for the years ended December 31, 2020, 2019 and 2018, respectively.
Included in the “Premises” line item in the table above is $
1,882
of held-for-sale assets that have been marked to fair value at December 31, 2020 as part of the Company’s system-wide branch evaluation effort. The adjustments to mark the properties to fair value are a noninterest expense and are included in the “Restructuring charges” line item on the Consolidated Statements of Income.
See Note 25, “Leases,” for further details regarding the Company’s right-of-use assets.
117
Renasant Corporation and Subsidiaries
Notes to Consolidated Financial Statements
Note 7 –
Other Real Estate Owned
(In Thousands)
The following table provides details of the Company’s other real estate owned (“OREO”) purchased and non purchased, net of valuation allowances and direct write-downs, as of the dates presented:
| Purchased OREO | Non Purchased OREO |
Total
OREO |
|||||||||||||||
| December 31, 2020 | |||||||||||||||||
| Residential real estate | $ |
|
$ |
|
$ |
|
|||||||||||
| Commercial real estate |
|
|
|
||||||||||||||
| Residential land development |
|
|
|
||||||||||||||
| Commercial land development |
|
|
|
||||||||||||||
| Total | $ |
|
$ |
|
$ |
|
|||||||||||
| December 31, 2019 | |||||||||||||||||
| Residential real estate | $ |
|
$ |
|
$ |
|
|||||||||||
| Commercial real estate |
|
|
|
||||||||||||||
| Residential land development |
|
|
|
||||||||||||||
| Commercial land development |
|
|
|
||||||||||||||
| Total | $ |
|
$ |
|
$ |
|
|||||||||||
Changes in the Company’s purchased and non purchased OREO were as follows for the periods presented:
| Purchased OREO | Non Purchased OREO |
Total
OREO |
|||||||||||||||
| Balance at December 31, 2018 | $ |
|
$ |
|
$ |
|
|||||||||||
| Transfers of loans |
|
|
|
||||||||||||||
| Impairments |
(
|
(
|
(
|
||||||||||||||
| Dispositions |
(
|
(
|
(
|
||||||||||||||
| Other |
(
|
|
(
|
||||||||||||||
| Balance at December 31, 2019 | $ |
|
$ |
|
$ |
|
|||||||||||
| Transfers of loans |
|
|
|
||||||||||||||
| Impairments |
(
|
(
|
(
|
||||||||||||||
| Dispositions |
(
|
(
|
(
|
||||||||||||||
| Other |
(
|
|
(
|
||||||||||||||
| Balance at December 31, 2020 | $ |
|
$ |
|
$ |
|
|||||||||||
At December 31, 2020 and 2019, the amortized cost of loans secured by Real Estate - 1-4 Family Mortgage in the process of foreclosure was $
1,308
and $
1,079
, respectively.
118
Renasant Corporation and Subsidiaries
Notes to Consolidated Financial Statements
Note 7 – Other Real Estate Owned (continued)
Components of the line item “Other real estate owned” in the Consolidated Statements of Income were as follows, as of the dates presented:
| December 31, | |||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||
| Repairs and maintenance | $ |
|
$ |
|
$ |
|
|||||||||||
| Property taxes and insurance |
|
|
|
||||||||||||||
| Impairments |
|
|
|
||||||||||||||
| Net (gains) losses on OREO sales |
(
|
|
(
|
||||||||||||||
| Rental income |
(
|
(
|
(
|
||||||||||||||
| Total | $ |
|
$ |
|
$ |
|
|||||||||||
Note 8 –
Goodwill and Other Intangible Assets
(In Thousands)
Changes in the carrying amount of goodwill during the years ended December 31, 2020 were as follows:
| Community Banks | Insurance | Total | |||||||||||||||
| Balance at December 31, 2018 | $ |
|
$ |
|
$ |
|
|||||||||||
| Measurement period adjustments to goodwill from Brand acquisition |
|
|
|
||||||||||||||
| Balance at December 31, 2019 | $ |
|
$ |
|
$ |
|
|||||||||||
| Additions to goodwill and other adjustments |
|
|
|
||||||||||||||
| Balance at December 31, 2020 | $ |
|
$ |
|
$ |
|
|||||||||||
The 2019 addition to goodwill resulted from measurement period adjustments from the Brand Group Holdings, Inc. (“Brand”) acquisition in September 2018 and is primarily related to adjustments on the fair value of loans, debt and other assets. The purchase accounting related to the Brand acquisition is now final. There were no changes to goodwill during the year ended December 31, 2020.
The following table provides a summary of finite-lived intangible assets as of the dates presented:
|
Gross Carrying
Amount |
Accumulated
Amortization |
Net Carrying
Amount |
|||||||||||||||
| December 31, 2020 | |||||||||||||||||
| Core deposit intangible | $ |
|
$ |
(
|
$ |
|
|||||||||||
| Customer relationship intangible |
|
(
|
|
||||||||||||||
| Total finite-lived intangible assets | $ |
|
$ |
(
|
$ |
|
|||||||||||
| December 31, 2019 | |||||||||||||||||
| Core deposit intangible | $ |
|
$ |
(
|
$ |
|
|||||||||||
| Customer relationship intangible |
|
(
|
|
||||||||||||||
| Total finite-lived intangible assets | $ |
|
$ |
(
|
$ |
|
|||||||||||
Core deposit intangible amortization expense for the years ended December 31, 2020, 2019 and 2018 was $
6,940
, $
7,965
and $
7,048
, respectively. Customer relationship intangible amortization expense for the year ended December 31, 2020, 2019, and 2018 was $
181
, $
140
, and $
131
, respectively.
119
Renasant Corporation and Subsidiaries
Notes to Consolidated Financial Statements
Note 8 – Goodwill and Other Intangible Assets (continued)
The estimated amortization expense of finite-lived intangible assets for the five succeeding fiscal years is summarized as follows:
| Core Deposit Intangible | Customer Relationship Intangible | Total | |||||||||||||||
| 2021 | $ |
|
$ |
|
$ |
|
|||||||||||
| 2022 |
|
|
|
||||||||||||||
| 2023 |
|
|
|
||||||||||||||
| 2024 |
|
|
|
||||||||||||||
| 2025 |
|
|
|
||||||||||||||
Note 9 –
Mortgage Servicing Rights
(In Thousands)
Changes in the Company’s mortgage servicing rights (“MSRs”) were as follows, for the periods presented:
| Carrying Value at January 1, 2019 | $ |
|
|||
| Capitalization |
|
||||
| Amortization |
(
|
||||
| Valuation adjustment |
(
|
||||
| Carrying Value at December 31, 2019 | $ |
|
|||
| Capitalization |
|
||||
| Amortization |
(
|
||||
| Valuation adjustment |
(
|
||||
| Carrying Value at December 31, 2020 | $ |
|
|||
The Company recognized a negative valuation adjustment on MSRs in earnings in the amount of $
11,726
and $
1,836
during the years ended December 31, 2020 and 2019, respectively, which was included in “Mortgage banking income” in the Consolidated Statements of Income. There were
no
such adjustments recognized during 2018. The movement of mortgage interest rates has an inverse relationship with prepayment speeds and discount rates. The decline in interest rates during 2020, which resulted in higher than estimated prepayments speeds, was the largest contributor to the negative valuation adjustment. A continued decline in mortgage interest rates and an increase in actual prepayment speeds may cause additional negative adjustments to the valuation of the Company’s MSRs.
Data and key economic assumptions related to the Company’s mortgage servicing rights as of December 31 are as follows:
| 2020 | 2019 | 2018 | |||||||||||||||
| Unpaid principal balance | $ |
|
$ |
|
$ |
|
|||||||||||
| Weighted-average prepayment speed (CPR) |
|
% |
|
% |
|
% | |||||||||||
| Estimated impact of a 10% increase | $ |
(
|
$ |
(
|
$ |
(
|
|||||||||||
| Estimated impact of a 20% increase |
(
|
(
|
(
|
||||||||||||||
| Discount rate |
|
% |
|
% |
|
% | |||||||||||
| Estimated impact of a 100bp increase | $ |
(
|
$ |
(
|
$ |
(
|
|||||||||||
| Estimated impact of a 200bp increase |
(
|
(
|
(
|
||||||||||||||
| Weighted-average coupon interest rate |
|
% |
|
% |
|
% | |||||||||||
| Weighted-average servicing fee (basis points) |
|
|
|
||||||||||||||
| Weighted-average remaining maturity (in years) |
|
|
|
||||||||||||||
120
Renasant Corporation and Subsidiaries
Notes to Consolidated Financial Statements
Note 9 – Mortgage Servicing Rights (continued)
Note 10 –
Deposits
(In Thousands)
The following is a summary of deposits as of December 31:
| 2020 | 2019 | ||||||||||
| Noninterest-bearing deposits | $ |
|
$ |
|
|||||||
| Interest-bearing demand deposits |
|
|
|||||||||
| Savings deposits |
|
|
|||||||||
| Time deposits |
|
|
|||||||||
| Total deposits | $ |
|
$ |
|
|||||||
The approximate scheduled maturities of time deposits at December 31, 2020 are as follows:
| 2021 | $ |
|
|||
| 2022 |
|
||||
| 2023 |
|
||||
| 2024 |
|
||||
| 2025 |
|
||||
| Thereafter |
|
||||
| Total | $ |
|
|||
The aggregate amount of time deposits in denominations of $250 or more at December 31, 2020 and 2019 was $
426,762
and $
585,717
, respectively. Certain executive officers and directors and their respective affiliates had amounts on deposit with Renasant Bank of approximately $
25,302
and $
33,929
at December 31, 2020 and 2019, respectively.
Note 11 –
Short-Term Borrowings
(In Thousands)
Short-term borrowings as of December 31 are summarized as follows:
| 2020 | 2019 | ||||||||||
| Securities sold under agreements to repurchase | $ |
|
$ |
|
|||||||
| Federal funds purchased |
|
|
|||||||||
| Federal Home Loan Bank short-term advances |
|
|
|||||||||
| Total short-term borrowings | $ |
|
$ |
|
|||||||
Securities sold under agreements to repurchase (“repurchase agreements”) represent funds received from customers, generally on an overnight or continuous basis, which are collateralized by investment securities owned or, at times, borrowed and re-hypothecated by the Company. The securities used as collateral consist primarily of U.S. Government agency mortgage backed securities, U.S. Government agency collateralized mortgage obligations, obligations of U.S. Government agencies, and obligations of states and political subdivisions. All securities are maintained by the Company’s safekeeping agents. These securities are reviewed by the Company on a daily basis, and the Company may be required to provide additional collateral due to changes in the fair market value of these securities. The terms of the Company’s repurchase agreements are continuous but may be canceled at any time by the Company or the customer.
121
Renasant Corporation and Subsidiaries
Notes to Consolidated Financial Statements
Note 11 – Short-Term Borrowings (continued)
Federal funds are short term borrowings, generally overnight borrowings, between financial institutions that are generally used to maintain reserve requirements at the Federal Reserve Bank or elsewhere.
FHLB short-term advances are borrowings with original maturities of less than one year. In connection with the prepayment of $
430,000
in short-term advances from the FHLB during 2020, the Company incurred penalty charges of $
121
, which is included in the line item “Debt prepayment penalty” in the Consolidated Statements of Income. The Company did not prepay any outstanding short-term advances from the FHLB in 2019 or 2018.
The average balances and cost of funds of short-term borrowings for the years ending December 31 are summarized as follows:
| Average Balances | Cost of Funds | ||||||||||||||||||||||||||||||||||
| 2020 | 2019 | 2018 | 2020 | 2019 | 2018 | ||||||||||||||||||||||||||||||
| Federal Home Loan Bank short-term advances | $ |
|
$ |
|
$ |
|
|
% |
|
% |
|
% | |||||||||||||||||||||||
| Federal funds purchased |
|
|
|
|
|
|
|||||||||||||||||||||||||||||
| Securities sold under agreements to repurchase |
|
|
|
|
|
|
|||||||||||||||||||||||||||||
| Total short-term borrowings | $ |
|
$ |
|
$ |
|
|
% |
|
% |
|
% | |||||||||||||||||||||||
The Company maintains lines of credit with correspondent banks totaling $
180,000
at December 31, 2020. Interest is charged at the market federal funds rate on all advances. There were
no
amounts outstanding under these lines of credit at December 31, 2020 or 2019.
Note 12 –
Long-Term Debt
(In Thousands)
Long-term debt as of December 31, 2020 and 2019 is summarized as follows:
| 2020 | 2019 | ||||||||||
| Federal Home Loan Bank advances | $ |
|
$ |
|
|||||||
| Junior subordinated debentures |
|
|
|||||||||
| Subordinated notes |
|
|
|||||||||
| Total long-term debt | $ |
|
$ |
|
|||||||
Federal Home Loan Bank Advances
Long-term advances from the FHLB outstanding at December 31, 2020 had maturities ranging from 2021 to 2030 with a combination of fixed and floating rates ranging from
0.00
% to
4.34
%. The long-term advance with no interest rate is the result of a floating-to-fixed advance that has a floating rate of three-month LIBOR less
50
basis points with a zero percent floor. This floating-to-fixed advance will convert to a fixed rate of
1.358
% in October 2021. Weighted-average interest rates on outstanding advances at December 31, 2020 and 2019 were
0.05
% and
1.53
%, respectively. These advances are collateralized by a blanket lien on the Bank’s loans. The Company had availability on unused lines of credit with the FHLB of $
3,784,520
at December 31, 2020.
In connection with the prepayment of $
2,094
in long-term advances from the FHLB during 2019, the Company incurred penalty charges of $
54
, which is included under the line item “Debt prepayment penalty” in the Consolidated Statements of Income. The Company did
no
t prepay any outstanding long-term advances from the FHLB during 2020 or 2018.
Junior Subordinated Debentures
The Company owns the outstanding common securities of business trusts that issued corporation-obligated mandatorily redeemable preferred capital securities to third-party investors. The trusts used the proceeds from the issuance of their preferred capital securities and common securities (collectively referred to as “capital securities”) to buy floating rate junior subordinated debentures issued by the Company (or by companies that the Company subsequently acquired). The debentures are the trusts’ only assets and interest payments from the debentures finance the distributions paid on the capital securities. Distributions on
122
Renasant Corporation and Subsidiaries
Notes to Consolidated Financial Statements
Note 12 – Long-Term Debt (continued)
the capital securities are payable quarterly at a rate per annum equal to the interest rate being earned by the trusts on the debentures held by the trusts. The capital securities are subject to mandatory redemption, in whole or in part, upon repayment of the debentures. The Company has entered into an agreement which fully and unconditionally guarantees the capital securities of each trust subject to the terms of the guarantee.
The following table provides details on the debentures as of December 31, 2020:
|
Principal
Amount |
Interest Rate |
Year of
Maturity |
Amount
Included in Tier 1 Capital |
||||||||||||||||||||
| PHC Statutory Trust I | $ |
|
|
% | 2033 | $ |
|
||||||||||||||||
| PHC Statutory Trust II |
|
|
2035 |
|
|||||||||||||||||||
| Capital Bancorp Capital Trust I |
|
|
2035 |
|
|||||||||||||||||||
| First M&F Statutory Trust I |
|
|
2036 |
|
|||||||||||||||||||
| Brand Group Holdings Statutory Trust I |
|
|
2035 |
|
|||||||||||||||||||
| Brand Group Holdings Statutory Trust II |
|
|
2037 |
|
|||||||||||||||||||
| Brand Group Holdings Statutory Trust III |
|
|
2038 |
|
|||||||||||||||||||
| Brand Group Holdings Statutory Trust IV |
|
|
2038 |
|
|||||||||||||||||||
During 2003, the Company formed PHC Statutory Trust I to provide funds for the cash portion of the Renasant Bancshares, Inc. acquisition. The interest rate for PHC Statutory Trust I reprices quarterly equal to the three-month LIBOR at the determination date plus
285
basis points. In April 2012, the Company entered into an interest rate swap agreement effective March 17, 2014, pursuant to which the Company receives a variable rate of interest based on the three-month LIBOR plus a spread of
2.85
% and pays a fixed rate of interest of
5.49
%. The debentures owned by PHC Statutory Trust I are currently redeemable at par.
During 2005, the Company formed PHC Statutory Trust II to provide funds for the cash portion of the Heritage Financial Holding Corporation acquisition. The interest rate for PHC Statutory Trust II reprices quarterly equal to the three-month LIBOR at the determination date plus
187
basis points. The debentures owned by PHC Statutory Trust II are currently redeemable at par.
In connection with the acquisition of Capital Bancorp, Inc. in 2007, the Company assumed the debentures issued to Capital Bancorp Capital Trust I. The discount associated with the Company’s assumption of the debentures issued to Capital Bancorp Capital Trust I was fully amortized during 2010. The interest rate for Capital Bancorp Capital Trust I reprices quarterly equal to the three-month LIBOR plus
150
basis points. In March 2012, the Company entered into an interest rate swap agreement effective March 31, 2014, whereby the Company receives a variable rate of interest based on the three-month LIBOR plus a spread of
1.50
% and pays a fixed rate of interest of
4.42
%. The debentures owned by Capital Bancorp Capital Trust I are currently redeemable at par.
In connection with the acquisition of First M&F Corporation in 2013, the Company assumed the debentures issued to First M&F Statutory Trust I. The discount associated with the Company’s assumption of the debentures issued to First M&F Statutory Trust I had a carrying value of $
8,354
at December 31, 2020 and $
8,902
at December 31, 2019. The discount is being amortized through March 2036. The interest rate for First M&F Statutory Trust I reprices quarterly equal to the three-month LIBOR plus a spread of
133
basis points. In April 2018, the Company entered into an interest rate swap agreement effective June 15, 2018, whereby the Company pays a fixed rate of
4.180
% and receives a variable rate of three-month LIBOR plus a spread of
133
basis points on a quarterly basis and will mature in June 2028. The debentures owned by First M&F Statutory Trust I are currently redeemable at par.
In connection with the acquisition of Brand in 2018, the Company assumed the debentures issued to Brand Group Holdings Statutory Trust I, Brand Group Holdings Statutory Trust II, Brand Group Holdings Statutory Trust III and Brand Group Holdings Statutory Trust IV. The discount associated with the Company’s assumption of the debentures issued to the respective Brand trusts had a carrying value of $
443
at December 31, 2020 and $
474
at December 31, 2019 and is being amortized through September 2038. The interest rate for each trust acquired from Brand reprices quarterly equal to the three-month LIBOR at the determination date plus
205
basis points for Brand Group Holdings Statutory Trust I, plus
300
basis points for Brand Group Holdings Statutory Trust II and III, and plus
375
basis points for Brand Group Holdings Statutory Trust IV. The debentures owned by the respective trusts listed above are all currently redeemable at par.
123
Renasant Corporation and Subsidiaries
Notes to Consolidated Financial Statements
Note 12 – Long-Term Debt (continued)
The Company has classified $
107,203
of the debentures described in the above paragraphs as Tier 1 capital. Federal Reserve guidelines limit the amount of securities that, similar to our junior subordinated debentures, are includable in Tier 1 capital, but these guidelines did not impact the amount of debentures we include in Tier 1 capital. Although the Company’s existing junior subordinated debentures are currently unaffected by these Federal Reserve guidelines, on account of changes enacted as part of the Dodd-Frank Act, any new trust preferred securities are not includable in Tier 1 capital. Further, if as a result of an acquisition the Company exceeds $
15,000,000
in assets, or if the Company makes any acquisition after exceeding $
15,000,000
in assets, the Company will lose Tier 1 treatment of our junior subordinated debentures.
For more information about the Company’s derivative financial instruments, see Note 14, “Derivative Instruments.”
Subordinated notes
On August 22, 2016, the Company issued and sold in an underwritten public offering $
60,000
aggregate principal amount of its
5.00
% Fixed-to-Floating Rate Subordinated Notes due 2026 (the “2026 Notes”) and $
40,000
aggregate principal amount of its
5.50
% Fixed-to-Floating Rate Subordinated Notes due 2031 (the “2031 Notes”), at a public offering price equal to
100
% of the aggregate principal amounts of the notes. As part of the Metropolitan BancGroup, Inc. acquisition in 2017, the Company assumed $
15,000
of
6.50
% Fixed-to-Floating Rate Subordinated Notes due 2026 (the “Metropolitan Notes”). On September 3, 2020, the Company issued and sold in an underwritten public offering $
100,000
aggregate principal amount of its
4.50
% Fixed-to-Floating Rate Subordinated Notes due 2035 (the “2035 Notes”; the 2026 Notes, the 2031 Notes, the 2035 Notes and the Metropolitan Notes are referred to collectively as the “Notes”), at a public offering price equal to
100
% of the aggregate principal amounts of the Notes.
During 2019, the Company redeemed the $
30,000
of
8.50
% Fixed Rate Subordinated Notes assumed in the Brand acquisition and incurred a debt prepayment penalty of $
900
, which was accounted for in the purchase accounting fair value adjustment.
The Metropolitan Notes, 2026 Notes, 2031 Notes and 2035 Notes mature on July 1, 2026, September 1, 2026, September 1, 2031 and September 15, 2035, respectively. Until but excluding July 1, 2021, the Company pays interest on the Metropolitan Notes semi-annually in arrears on each January 1 and July 1 at a fixed annual interest rate equal to
6.50
%. From and including July 1, 2021 to but excluding the maturity date or the date of earlier redemption, the interest rate on the Metropolitan Notes will reset quarterly to an annual interest rate equal to the then-current three-month LIBOR rate plus a spread of
554.5
basis points, payable quarterly in arrears on each January 1, April 1, July 1 and October 1. Until but excluding September 1, 2021 and 2026, respectively, the Company pays interest on the 2026 Notes and 2031 Notes semi-annually in arrears on each March 1 and September 1 at a fixed annual interest rate equal to
5.00
% and
5.50
%, respectively. From and including September 1, 2021 and 2026, respectively, to but excluding the maturity date or the date of earlier redemption, the interest rate on the 2026 Notes and 2031 Notes will reset quarterly to an annual interest rate equal to the then-current three-month LIBOR rate plus a spread of
384
basis points and
407.1
basis points, respectively, payable quarterly in arrears on each March 1, June 1, September 1 and December 1. Until but excluding September 15, 2030, the Company pays interest on the 2035 Notes semi-annually in arrears on each March 15 and September 15 at a fixed annual interest rate equal to
4.50
%. From and including September 15, 2030, to but excluding the maturity date or the date of earlier redemption, the interest rate on the 2035 Notes will reset quarterly to an annual interest rate equal to the then-current three-month SOFR plus a spread of
402.5
basis points, payable quarterly in arrears on each March 15, June 15, September 15 and December 15. Notwithstanding the foregoing, for all of the Notes, in the event that three-month LIBOR or three-month SOFR is less than
zero
, three-month LIBOR or three-month SOFR, as applicable, shall be deemed to be
zero
. Beginning with the interest payment date of July 1, 2021 as to the Metropolitan Notes, September 1, 2021 as to the 2026 Notes, September 1, 2026 as to the 2031 Notes, and September 15, 2030 as to the 2035 Notes, and on any interest payment date thereafter, the Company may redeem the applicable Notes in whole or in part at a redemption price equal to
100
% of the principal amount of the respective Notes to be redeemed plus accrued and unpaid interest to but excluding the date of redemption.
The Company may also redeem any series of the Notes at any time, at the Company’s option, in whole or in part, if: (i) a change or prospective change in law occurs that could prevent the Company from deducting interest payable on the Notes for U.S. federal income tax purposes; (ii) a subsequent event occurs that could preclude the Notes from being recognized as Tier 2 capital for regulatory capital purposes; or (iii) the Company is required to register as an investment company under the Investment Company Act of 1940, as amended. In each case, the redemption price is
100
% of the principal amount of the Notes being redeemed plus any accrued and unpaid interest to but excluding the redemption date. There is no sinking fund for the benefit of the Notes, and none of the Notes are convertible or exchangeable.
124
Renasant Corporation and Subsidiaries
Notes to Consolidated Financial Statements
Note 12 – Long-Term Debt (continued)
The aggregate stated maturities of long-term debt outstanding at December 31, 2020, are summarized as follows:
| 2021 | $ |
|
|||
| 2022 |
|
||||
| 2023 |
|
||||
| 2024 |
|
||||
| 2025 |
|
||||
| Thereafter |
|
||||
| Total | $ |
|
|||
Note 13 –
Employee Benefit and Deferred Compensation Plans
(In Thousands, Except Share Data)
Pension and Post-retirement Medical Plans
The Company sponsors a noncontributory defined benefit pension plan, under which participation and benefit accruals ceased as of December 31, 1996. The Company’s funding policy is to contribute annually to the plan an amount not less than the minimum required contribution, as determined annually by consulting actuaries in accordance with funding standards imposed under the Internal Revenue Code of 1986, as amended.
No
contributions were made or required in 2020 or 2019. The Company does not anticipate that a contribution will be required in 2021. The plan’s accumulated benefit obligation and projected benefit obligation are substantially the same since benefit accruals have ceased. The accumulated benefit obligation was $
28,226
and $
28,020
at December 31, 2020 and 2019, respectively. There is no additional minimum pension liability required to be recognized.
The Company provides retiree medical benefits, consisting of the opportunity to purchase coverage at subsidized rates under the Company’s group medical plan. Employees eligible to participate must (i) have been employed by the Company and enrolled in the Company’s group medical plan as of December 31, 2004 and (ii) retire from the Company between ages
55
and
65
with at least
15
years of service or
70
points (points determined as the sum of the employee’s age and years of service). The Company periodically determines the portion of the premiums to be paid by each retiree and the portion to be paid by the Company. Coverage ceases when a retiree attains age
65
and is eligible for Medicare. The Company contributed $
214
and $
151
to the plan in 2020 and 2019, respectively; the Company expects to contribute approximately $
360
in 2021.
The Company accounts for its obligations related to retiree benefits in accordance with ASC 715, “Compensation – Retirement Benefits.” The assumed rate of increase in the per capita cost of covered benefits (i.e., the health care cost trend rate) for 2021 is
5.4
%. Increasing or decreasing the assumed health care cost trend rates by one percentage point in each year would not materially increase or decrease the accumulated post-retirement benefit obligation or the service and interest cost components of net periodic post-retirement benefit costs as of December 31, 2020 and for the year then ended.
In 2020, the Company offered a voluntary early retirement window program (referred to as the “VERP”) to eligible employees. Among other items, participants in the VERP received accelerated payouts from the Company’s defined benefit pension plan, retiree medical benefits on terms substantially identical to those applicable to other retirees, and other cash payments. Cash payments are a noninterest expense and are included in the “Restructuring charges” line item on the Consolidated Statements of Income. Amounts attributable to accelerated payouts from the defined benefit pension plan and post-retirement health benefits for participants in the VERP are included in the following tables.
125
Renasant Corporation and Subsidiaries
Notes to Consolidated Financial Statements
Note 13 – Employee Benefit and Deferred Compensation Plans (continued)
| Pension Benefits Renasant | Other Benefits | ||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
| Change in benefit obligation | |||||||||||||||||||||||
| Benefit obligation at beginning of year | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
| Service cost |
|
|
|
|
|||||||||||||||||||
| Interest cost |
|
|
|
|
|||||||||||||||||||
| Plan participants’ contributions |
|
|
|
|
|||||||||||||||||||
|
Amendments
(1)
|
|
|
|
|
|||||||||||||||||||
| Actuarial loss (gain) |
|
|
|
(
|
|||||||||||||||||||
|
Benefits paid
(1)
|
(
|
(
|
(
|
(
|
|||||||||||||||||||
| Benefit obligation at end of year | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
| Change in fair value of plan assets | |||||||||||||||||||||||
| Fair value of plan assets at beginning of year | $ |
|
$ |
|
|||||||||||||||||||
| Actual return on plan assets |
|
|
|||||||||||||||||||||
| Contribution by employer |
|
|
|||||||||||||||||||||
| Benefits paid |
(
|
(
|
|||||||||||||||||||||
| Fair value of plan assets at end of year | $ |
|
$ |
|
|||||||||||||||||||
| Funded status at end of year | $ |
|
$ |
|
$ |
(
|
$ |
(
|
|||||||||||||||
| Weighted-average assumptions as of December 31 | |||||||||||||||||||||||
| Discount rate used to determine the benefit obligation |
|
% |
|
% |
|
% |
|
% | |||||||||||||||
(1)
Attributable to retiree medical benefits and $
2,073
of accelerated defined benefit pension plan payouts in 2020 provided to VERP participants.
The discount rate assumptions at December 31, 2020 were determined using a yield curve approach. A yield curve was developed from a selection of high quality fixed-income investments whose cash flows approximate the timing and amount of expected cash flows from the plans. The selected discount rate is the rate that produces the same present value of the plans’ projected benefit payments.
126
Renasant Corporation and Subsidiaries
Notes to Consolidated Financial Statements
Note 13 – Employee Benefit and Deferred Compensation Plans (continued)
The components of net periodic benefit cost and other amounts recognized in other comprehensive income for the defined benefit pension and post-retirement health and life plans for the years ended December 31, 2020, 2019 and 2018 are as follows:
| Pension Benefits Renasant | Other Benefits | ||||||||||||||||||||||||||||||||||
| 2020 | 2019 | 2018 | 2020 | 2019 | 2018 | ||||||||||||||||||||||||||||||
| Service cost | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||||||||||
| Interest cost |
|
|
|
|
|
|
|||||||||||||||||||||||||||||
| Expected return on plan assets |
(
|
(
|
(
|
|
|
|
|||||||||||||||||||||||||||||
|
Prior service cost recognized
(1)
|
|
|
|
|
|
|
|||||||||||||||||||||||||||||
| Recognized actuarial loss (gain) |
|
|
|
(
|
(
|
|
|||||||||||||||||||||||||||||
|
Settlement/curtailment/termination losses
(1)
|
|
|
|
|
|
|
|||||||||||||||||||||||||||||
| Net periodic benefit cost |
|
|
(
|
|
|
|
|||||||||||||||||||||||||||||
| Net actuarial (gain) loss arising during the period |
(
|
(
|
(
|
|
(
|
(
|
|||||||||||||||||||||||||||||
|
Net Settlement/curtailment/termination losses
(1)
|
(
|
|
|
|
|
|
|||||||||||||||||||||||||||||
|
New prior service cost
(1)
|
|
|
|
|
|
|
|||||||||||||||||||||||||||||
| Amortization of net actuarial (loss) gain recognized in net periodic pension cost |
(
|
(
|
(
|
|
|
|
|||||||||||||||||||||||||||||
|
Amortization of prior service cost
(1)
|
|
|
|
(
|
|
|
|||||||||||||||||||||||||||||
| Total recognized in other comprehensive income |
(
|
(
|
(
|
|
(
|
(
|
|||||||||||||||||||||||||||||
| Total recognized in net periodic benefit cost and other comprehensive income | $ |
(
|
$ |
(
|
$ |
(
|
$ |
|
$ |
(
|
$ |
(
|
|||||||||||||||||||||||
| Weighted-average assumptions as of December 31 | |||||||||||||||||||||||||||||||||||
| Discount rate used to determine net periodic pension cost |
|
% |
|
% |
|
% |
|
% |
|
% |
|
% | |||||||||||||||||||||||
| Expected return on plan assets |
|
% |
|
% |
|
% | N/A | N/A | N/A | ||||||||||||||||||||||||||
(1)
Attributable to retiree medical benefits and accelerated defined benefit pension plan payouts provided to VERP participants and, with respect to amounts included in Net periodic benefit cost, included in the “Restructuring charges” line item on the Consolidated Statements of Income.
Future estimated benefit payments under the Renasant defined benefit pension plan and other benefits are as follows:
| Pension Benefits Renasant |
Other
Benefits |
||||||||||
| 2021 | $ |
|
$ |
|
|||||||
| 2022 |
|
|
|||||||||
| 2023 |
|
|
|||||||||
| 2024 |
|
|
|||||||||
| 2025 |
|
|
|||||||||
| 2026 - 2030 |
|
|
|||||||||
127
Renasant Corporation and Subsidiaries
Notes to Consolidated Financial Statements
Note 13 – Employee Benefit and Deferred Compensation Plans (continued)
Amounts recognized in accumulated other comprehensive income, before tax, for the year ended December 31, 2020 are as follows:
| Pension Benefits Renasant |
Other
Benefits |
||||||||||
| Prior service cost | $ |
|
$ |
|
|||||||
| Actuarial loss (gain) |
|
(
|
|||||||||
| Total | $ |
|
$ |
(
|
|||||||
The estimated costs that will be amortized from accumulated other comprehensive income into net periodic benefit cost over the next fiscal year are as follows:
| Pension Benefits Renasant |
Other
Benefits |
||||||||||
| Prior service cost | $ |
|
$ |
|
|||||||
| Actuarial loss (gain) |
|
|
|||||||||
| Total | $ |
|
$ |
|
|||||||
Substantially all of the assets of the Company’s defined benefit pension plan are invested in a collective trust, which in turn invests in other collective or pooled trusts with individual investment mandates. The collective trust’s asset allocation is approximately
55
% in growth assets, consisting of interests in trusts invested in equity securities, high yield fixed income securities, and direct real estate investments (approximately
5
% of assets), and approximately
45
% in assets intended to hedge against the volatility arising from interest rate risk, consisting of interests in trusts invested in long duration fixed income securities. The collective trust is actively managed allowing changes in the asset allocation to enhance returns and mitigate risk, with the mandate to preserve the funded status of the plan through portfolio growth and interest rate hedging. Management’s investment committee periodically reviews the collective trust’s performance and asset allocation to ensure that the plan’s investment objectives are satisfied and that the investment strategy of the trust has not materially changed.
The expected long-term rate of return was estimated using market benchmarks for investment classes applied to the plan’s target asset allocation and was computed using a valuation methodology which projects future returns based on current valuations rather than historical returns.
The fair values of the Company’s defined benefit pension plan assets by category at December 31, 2020 and 2019 are below. Investments in collective trusts, which are measured at net asset value per share (or “NAV”), consist of trusts that invest primarily in liquid equity and fixed income securities and have a small direct investment in real estate. There is generally no restriction on redemptions or withdrawals for benefit payments or in the event of plan termination;
60
days notice is required to redeem or withdraw assets for any other purpose.
|
Quoted Prices In
Active Markets for Identical Assets (Level 1) |
Significant
Other Observable Inputs (Level 2) |
Significant
Unobservable Inputs (Level 3) |
Measured at NAV | Totals | |||||||||||||||||||||||||
| December 31, 2020 | |||||||||||||||||||||||||||||
| Cash and cash equivalents | $ |
|
$ |
|
$ |
|
$ | — | $ |
|
|||||||||||||||||||
| Investments in collective trusts | — | — | — |
|
|
||||||||||||||||||||||||
| $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
||||||||||||||||||||
128
Renasant Corporation and Subsidiaries
Notes to Consolidated Financial Statements
Note 13 – Employee Benefit and Deferred Compensation Plans (continued)
|
Quoted Prices In
Active Markets for Identical Assets (Level 1) |
Significant
Other Observable Inputs (Level 2) |
Significant
Unobservable Inputs (Level 3) |
Measured at NAV | Totals | |||||||||||||||||||||||||
| December 31, 2019 | |||||||||||||||||||||||||||||
| Cash and cash equivalents | $ |
|
$ |
|
$ |
|
$ | — | $ |
|
|||||||||||||||||||
| Investments in collective trusts | — | — | — |
|
|
||||||||||||||||||||||||
| $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
||||||||||||||||||||
Other Retirement Plans
The Company maintains a 401(k) plan, which is a contributory plan maintained in the form of a “safe harbor” arrangement. Employees are immediately enrolled in the plan and eligible to make pre-tax deferrals, subject to limits imposed under the plan and the deferral limit established annually by the IRS, and receive Company matching contributions not in excess of
4
% of compensation. The Company has also made a profit-sharing contribution for each eligible participant in an amount equal to
5
% of plan compensation and
5
% of plan compensation in excess of the Social Security wage base. To be eligible to receive this profit-sharing contribution, an employee must: (i) be employed on the last day of the year and be credited with
1000
hours of service during the year; (ii) die or become disabled during the year; or (iii) have attained the early or normal retirement age (as defined in the plan). With respect to the year ended December 31, 2019 and prior years, the Company’s profit-sharing contribution was nondiscretionary. Effective as of January 1, 2020, the Company amended the 401(k) plan to make the profit-sharing contribution discretionary for years ending after December 31, 2020. The Company’s costs related to the 401(k) plan, excluding employee deferrals, in 2020, 2019 and 2018 were $
17,888
, $
16,009
and $
13,477
, respectively.
Deferred Compensation Plans and Arrangements
The Company maintains
two
deferred compensation plans: a Deferred Stock Unit Plan and a Deferred Income Plan. Nonemployee directors may defer all or a portion of their fees and retainer; eligible officers may defer base salary and bonus subject to limits determined annually by the Company. Amounts deferred to the Deferred Stock Unit Plan are invested in units representing shares of the Company’s common stock; benefits are paid in the form of common stock, with cash distributed in lieu of fractional shares. Amounts deferred to the Deferred Income Plan are notionally invested in the discretion of each participant from among investment alternatives substantially similar to those available under the Company’s 401(k) plan. Directors and officers who participated in the predecessor to the Deferred Income Plan as of December 31, 2006, may also invest in a preferential interest rate alternative that is derived from the Moody’s Average Corporate Bond Rate. Benefits payable from the Deferred Income Plan equal the account balance of each participant. Beneficiaries of directors and officers who have continuously deferred at rates prescribed by the Company since January 1, 2005, and who die while employed by the Company or serving as a director may receive an additional preretirement death benefit from the Deferred Income Plan.
In connection with its acquisition of Brand Group Holdings, Inc. and its affiliates, the Company assumed the Brand Group Holdings, Inc. Deferred Compensation Plan. Deferral elections in effect as of the time of acquisition were given effect for compensation earned during 2018; no further deferrals have been or will be made to the plan. Account balances maintained under the plan will be distributed as provided under the terms of the plan and individual participant elections. Pending distribution, balances will be notionally invested by each participant in designated investment alternatives.
The Company’s Deferred Stock Unit and Deferred Income Plan are unfunded. It is anticipated that such plans will result in no additional cost to the Company because life insurance policies on the lives of participants have been purchased in amounts estimated to be sufficient to pay plan benefits. The Company is both the owner and beneficiary of the policies. The expense recorded in 2020, 2019 and 2018 for the Company’s Deferred Stock Unit and Deferred Income Plan, including in 2019 expense for the plan assumed in connection with the acquisition of Brand Group Holdings, Inc., inclusive of deferrals, was $
3,965
, $
3,610
and $
1,290
, respectively.
In 2007, the Company assumed supplemental executive retirement plans (SERPs) in connection with the acquisition of Capital Bancorp, Inc. and its affiliates. The plans are designed to provide
four
officers specified annual benefits for a
15
-year period upon the attainment of a designated retirement age. Liabilities associated with the SERPs totaled $
3,816
and $
3,921
at December 31, 2020 and 2019, respectively. The plans are not qualified under Section 401 of the Internal Revenue Code.
129
Renasant Corporation and Subsidiaries
Notes to Consolidated Financial Statements
Note 13 – Employee Benefit and Deferred Compensation Plans (continued)
Incentive Compensation Plans
Under the Company’s Performance Based Rewards Plan, annual cash bonuses are paid to eligible officers and employees, subject to the attainment of designated performance criteria that may relate to the Company’s performance, the performance of an affiliate, region, division or profit center, and/or to individual or team performance. The Company annually sets minimum, target, and superior levels of performance. Minimum performance must be attained for the payment of any bonus; superior performance must be attained for maximum payouts. The expense associated with the plan for 2020, 2019 and 2018 was $
6,425
, $
4,200
and $
5,117
, respectively.
In 2020, the Company implemented a long-term equity compensation plan that provides for the grant of stock options and stock appreciation rights and the award of restricted stock and restricted stock units (which replaced the Company’s previous long-term equity incentive compensation plan, under which stock option grants and restricted stock awards remain outstanding).
Options granted under the plan permit the acquisition of shares of the Company’s common stock at an exercise price equal to the fair market value of the shares on the date of grant. Options may be subject to time-based vesting or the attainment of performance criteria; all options expire
ten years
after the date of grant. Options that do not vest or expire unexercised are forfeited and canceled. Stock appreciation rights may be granted under the plan on terms similar to options. There were
no
stock options or stock appreciation rights granted during the years ended December 31, 2020, 2019 or 2018. There was
no
compensation expense (recognized or unrecognized) associated with options for the years ended December 31, 2020, 2019 or 2018.
The following table summarizes information about options outstanding, exercised and forfeited as of and for the three years ended December 31, 2020, 2019 and 2018:
| Shares |
Weighted
Average Exercise Price |
Weighted
Average Remaining Contractual Life |
Aggregate
Intrinsic Value |
||||||||||||||||||||
| Outstanding at January 1, 2018 |
|
$ |
|
||||||||||||||||||||
| Granted |
|
|
|||||||||||||||||||||
| Exercised |
(
|
|
|||||||||||||||||||||
| Forfeited |
(
|
|
|||||||||||||||||||||
| Outstanding at December 31, 2018 |
|
$ |
|
|
$ |
|
|||||||||||||||||
| Exercisable at December 31, 2018 |
|
$ |
|
|
$ |
|
|||||||||||||||||
| Granted |
|
|
|||||||||||||||||||||
| Exercised |
(
|
|
|||||||||||||||||||||
| Forfeited |
|
|
|||||||||||||||||||||
| Outstanding at December 31, 2019 |
|
$ |
|
|
$ |
|
|||||||||||||||||
| Exercisable at December 31, 2019 |
|
$ |
|
|
$ |
|
|||||||||||||||||
| Granted |
|
|
|||||||||||||||||||||
| Exercised |
(
|
|
|||||||||||||||||||||
| Forfeited |
|
|
|||||||||||||||||||||
| Outstanding at December 31, 2020 |
|
$ |
|
|
$ |
|
|||||||||||||||||
| Exercisable at December 31, 2020 |
|
$ |
|
|
$ |
|
|||||||||||||||||
The total intrinsic value of options exercised during the three years ended December 31, 2020, 2019 and 2018 was $
279
, $
290
and $
1,180
, respectively. All options outstanding during 2020, 2019 and 2018 were fully vested and exercisable as of December 31, 2017.
The plan permits the award of performance-based restricted stock to executives and other officers and employees and time-based restricted stock to non-employee directors, executives, and other officers and employees. The plan also permits the award of restricted stock units to executives and other officers and employees on terms similar to restricted stock awards. Performance-based awards are subject to the attainment of designated performance criteria during a fixed performance cycle. Performance criteria may relate to the Company’s performance measured on an absolute basis or relative to a defined peer
130
Renasant Corporation and Subsidiaries
Notes to Consolidated Financial Statements
Note 13 – Employee Benefit and Deferred Compensation Plans (continued)
group. Performance criteria may also relate to the performance of an affiliate, region, division or profit center of the Company or to individual performance. The Company annually sets minimum, target, and superior levels; minimum performance must be attained for the vesting of any shares; superior performance must be attained for maximum payouts. Time-based restricted stock awards relate to a fixed number of shares that vest at the end of a designated service period.
In 2020, the Company made performance-based and time-based restricted stock awards; restricted stock units were not awarded. The fair value of each restricted stock award is the closing price of the Company’s common stock on the business day immediately preceding the date of the award. For restricted stock awarded under the plan, the Company recorded compensation expense of $
10,419
, $
10,046
and $
7,251
for the years ended December 31, 2020, 2019 and 2018, respectively.
The following table summarizes the changes in restricted stock as of and for the year ended December 31, 2020:
|
Performance-
Based Restricted Stock |
Weighted
Average Grant-Date Fair Value |
Time-
Based Restricted Stock |
Weighted
Average Grant-Date Fair Value |
||||||||||||||||||||
| Not vested at beginning of year |
|
$ |
|
|
$ |
|
|||||||||||||||||
| Awarded |
|
|
|
|
|||||||||||||||||||
| Vested |
(
|
|
(
|
|
|||||||||||||||||||
| Forfeited and cancelled |
(
|
|
(
|
|
|||||||||||||||||||
| Not vested at end of year |
|
$ |
|
|
$ |
|
|||||||||||||||||
Unrecognized stock-based compensation expense related to restricted stock totaled $
10,185
at December 31, 2020. As of such date, the weighted average period over which the unrecognized expense is expected to be recognized was approximately
1.85
years.
At December 31, 2020, an aggregate of
2,871,774
shares of Company common stock were available for issuance under the Company’s employee benefit plans of which
957,320
shares were available for issuance under the Company’s 401(k) plan,
22,577
shares were available under the Company’s Deferred Stock Unit Plan, and
1,758,149
shares were available under the Company’s 2020 Long-Term Incentive Compensation Plan.
Note 14 –
Derivative Instruments
(In Thousands)
The Company uses certain derivative instruments to meet the needs of customers as well as to manage the interest rate risk associated with certain transactions.
Non-hedge derivatives
The Company enters into derivative instruments that are not designated as hedging instruments to help its commercial customers manage their exposure to interest rate fluctuations. To mitigate the interest rate risk associated with these customer contracts, the Company enters into an offsetting derivative contract position. The Company manages its credit risk, or potential risk of default by its commercial customers, through credit limit approval and monitoring procedures.
The Company enters into interest rate lock commitments with its customers to mitigate the interest rate risk associated with the commitments to fund fixed-rate residential mortgage loans. The Company also enters into forward commitments to sell residential mortgage loans to secondary market investors.
131
Renasant Corporation and Subsidiaries
Notes to Consolidated Financial Statements
Note 14 – Derivative Instruments (continued)
| Balance Sheet | December 31, 2020 | December 31, 2019 | |||||||||||||||||||||||||||
| Location | Notional Amount | Fair Value | Notional Amount | Fair Value | |||||||||||||||||||||||||
| Derivative assets: | |||||||||||||||||||||||||||||
| Interest rate contracts | Other Assets | $ |
|
$ |
|
$ |
|
$ |
|
||||||||||||||||||||
| Interest rate lock commitments | Other Assets |
|
|
|
|
||||||||||||||||||||||||
| Forward commitments | Other Assets |
|
|
|
|
||||||||||||||||||||||||
| Totals | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||||||||
| Derivative liabilities: | |||||||||||||||||||||||||||||
| Interest rate contracts | Other Liabilities | $ |
|
$ |
|
$ |
|
$ |
|
||||||||||||||||||||
| Interest rate lock commitments | Other Liabilities |
|
|
|
|
||||||||||||||||||||||||
| Forward commitments | Other Liabilities |
|
|
|
|
||||||||||||||||||||||||
| Totals | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||||||||
Gains (losses) included in the Consolidated Statements of Income related to the Company’s derivative financial instruments were as follows, as of the dates presented:
| Year Ended December 31, | |||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||
| Interest rate contracts: | |||||||||||||||||
| Included in interest income on loans | $ |
|
$ |
|
$ |
|
|||||||||||
| Interest rate lock commitments: | |||||||||||||||||
| Included in mortgage banking income |
|
|
|
||||||||||||||
| Forward commitments | |||||||||||||||||
| Included in mortgage banking income |
(
|
|
(
|
||||||||||||||
| Total | $ |
|
$ |
|
$ |
|
|||||||||||
Derivatives designated as cash flow hedges
Cash flow hedge relationships mitigate exposure to the variability of future cash flow or other forecasted transactions. The Company uses interest rate swap contracts in an effort to manage future interest rate exposure on borrowings. The hedging strategy converts the LIBOR-based variable interest rate on the forecasted borrowings to a fixed interest rate. As of December 31, 2020, the Company is hedging its exposure to the variability of future cash flows through 2030 and a portion of these hedges are forward starting.
The following table provides a summary of the Company’s derivatives designated as cash flow hedges as of the dates presented:
| Balance Sheet | December 31, 2020 | December 31, 2019 | |||||||||||||||||||||||||||
| Location | Notional Amount | Fair Value | Notional Amount | Fair Value | |||||||||||||||||||||||||
| Derivative assets: | |||||||||||||||||||||||||||||
| Interest rate swaps | Other Assets | $ |
|
$ |
|
$ |
|
$ |
|
||||||||||||||||||||
| Derivative liabilities: | |||||||||||||||||||||||||||||
| Interest rate swaps | Other Liabilities | $ |
|
$ |
|
$ |
|
$ |
|
||||||||||||||||||||
Changes in fair value of the cash flow hedges are, to the extent that the hedging relationship is effective, recorded as other comprehensive income and are subsequently recognized in earnings at the same time that the hedged item is recognized in earnings. The ineffective portions of the changes in fair value of the hedging instruments are immediately recognized in earnings. The assessment of the effectiveness of the hedging relationship is evaluated under the hypothetical derivative method. There were no ineffective portions for the years ended December 31, 2020, 2019 and 2018. The impact on other comprehensive income for the years ended December 31, 2020, 2019, and 2018, can be seen at Note 17, “Other Comprehensive Income.”
132
Renasant Corporation and Subsidiaries
Notes to Consolidated Financial Statements
Note 14 – Derivative Instruments (continued)
In December 2020, the Company terminated
two
interest rate swap contracts with notional amounts of $
15,000
each with ending dates of June 2022 and June 2023, respectively. The Company recorded $
2,040
in swap termination charges for the year ended December 31, 2020.
Derivatives designated as fair value hedges
Fair value hedges protect against changes in the fair value of an asset, liability, or firm commitment. The Company enters into interest rate swap agreements to manage interest rate exposure on certain of the Company’s fixed-rate subordinated notes. The agreements convert the fixed interest rates to LIBOR-based variable interest rates.
The following table provides a summary of the Company's derivatives designated as fair value hedges as of the dates presented:
| Balance Sheet | December 31, 2020 | December 31, 2019 | |||||||||||||||||||||||||||
| Location | Notional Amount | Fair Value | Notional Amount | Fair Value | |||||||||||||||||||||||||
| Derivative liabilities: | |||||||||||||||||||||||||||||
| Interest rate swaps | Other Liabilities | $ |
|
$ |
|
$ |
|
$ |
|
||||||||||||||||||||
The following table presents the effects of the Company’s fair value hedge relationships on the Consolidated Statements of Income for the periods presented:
| Amount of Gain (Loss Recognized in Income) | |||||||||||||||||||||||
| Income Statement | Year ended December 31, | ||||||||||||||||||||||
| Location | 2020 | 2019 | 2018 | ||||||||||||||||||||
| Derivative liabilities: | |||||||||||||||||||||||
| Interest rate swaps - subordinated notes | Interest Expense | $ |
(
|
$ |
|
$ |
|
||||||||||||||||
| Derivative liabilities - hedged items: | |||||||||||||||||||||||
| Interest rate swaps - subordinated notes | Interest Expense | $ |
|
$ |
|
$ |
|
||||||||||||||||
The following table presents the amounts that were recorded in the Consolidated Balance Sheets related to cumulative basis adjustments for fair value hedges for the as of the dates presented:
| Carrying Amount of the Hedged Liability | Cumulative Amount of Fair Value Hedging Adjustments Included in the Carrying Amount of the Hedged Liability | |||||||||||||||||||||||||
| Balance Sheet Location | December 31, 2020 | December 31, 2019 | December 31, 2020 | December 31, 2019 | ||||||||||||||||||||||
| Long-term debt | $ |
|
$ |
|
$ |
|
$ |
|
||||||||||||||||||
133
Renasant Corporation and Subsidiaries
Notes to Consolidated Financial Statements
Note 14 – Derivative Instruments (continued)
Offsetting
Certain financial instruments, including derivatives, may be eligible for offset in the consolidated balance sheet when the “right of setoff” exists or when the instruments are subject to an enforceable master netting agreement, which includes the right of the non-defaulting party or non-affected party to offset recognized amounts, including collateral posted with the counterparty, to determine a net receivable or net payable upon early termination of the agreement. Certain of the Company’s derivative instruments are subject to master netting agreements; however, the Company has not elected to offset such financial instruments in the Consolidated Balance Sheets.
The following table presents the Company’s gross derivative positions as recognized in the Consolidated Balance Sheets as well as the net derivative positions, including collateral pledged to the extent the application of such collateral did not reduce the net derivative liability position below zero, had the Company elected to offset those instruments subject to an enforceable master netting agreement as of the dates presented:
| Offsetting Derivative Assets | Offsetting Derivative Liabilities | ||||||||||||||||||||||
|
December 31,
2020 |
December 31,
2019 |
December 31,
2020 |
December 31,
2019 |
||||||||||||||||||||
| Gross amounts recognized | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
| Gross amounts offset in the consolidated balance sheets |
|
|
|
|
|||||||||||||||||||
| Net amounts presented in the consolidated balance sheets |
|
|
|
|
|||||||||||||||||||
| Gross amounts not offset in the consolidated balance sheets | |||||||||||||||||||||||
| Financial instruments |
|
|
|
|
|||||||||||||||||||
| Financial collateral pledged |
|
|
|
|
|||||||||||||||||||
| Net amounts | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
Note 15 –
Income Taxes
(In Thousands)
Significant components of the provision for income taxes are as follows for the periods presented:
| Year Ended December 31, | |||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||
| Current | |||||||||||||||||
| Federal | $ |
|
$ |
|
$ |
|
|||||||||||
| State |
|
|
|
||||||||||||||
|
|
|
|
|||||||||||||||
| Deferred | |||||||||||||||||
| Federal |
(
|
|
|
||||||||||||||
| State |
(
|
|
|
||||||||||||||
|
(
|
|
|
|||||||||||||||
| $ |
|
$ |
|
$ |
|
||||||||||||
134
Renasant Corporation and Subsidiaries
Notes to Consolidated Financial Statements
Note 15 – Income Taxes (continued)
The reconciliation of income taxes computed at the United States federal statutory tax rates to the provision for income taxes is as follows, for the periods presented:
| Year Ended December 31, | |||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||
| Tax at U.S. statutory rate | $ |
|
$ |
|
$ |
|
|||||||||||
| Increase (decrease) in taxes resulting from: | |||||||||||||||||
| Tax-exempt interest income |
(
|
(
|
(
|
||||||||||||||
| BOLI income |
(
|
(
|
(
|
||||||||||||||
| Investment tax credits |
(
|
(
|
(
|
||||||||||||||
| Amortization of investment in low-income housing tax credits |
|
|
|
||||||||||||||
| State income tax expense, net of federal benefit |
|
|
|
||||||||||||||
| Other items, net |
|
|
|
||||||||||||||
| $ |
|
$ |
|
$ |
|
||||||||||||
Significant components of the Company’s deferred tax assets and liabilities are as follows for the periods presented:
| December 31, | |||||||||||
| 2020 | 2019 | ||||||||||
| Deferred tax assets | |||||||||||
| Allowance for credit losses | $ |
|
$ |
|
|||||||
| Loans |
|
|
|||||||||
| Deferred compensation |
|
|
|||||||||
| Impairment of assets |
|
|
|||||||||
| Net operating loss carryforwards |
|
|
|||||||||
| Lease liabilities under operating leases |
|
|
|||||||||
| Other |
|
|
|||||||||
| Total deferred tax assets |
|
|
|||||||||
| Deferred tax liabilities | |||||||||||
| Net unrealized gains on securities |
|
|
|||||||||
| Investment in partnerships |
|
|
|||||||||
| Fixed assets |
|
|
|||||||||
| Mortgage servicing rights |
|
|
|||||||||
| Junior subordinated debt |
|
|
|||||||||
| Intangibles |
|
|
|||||||||
| Lease right-of-use asset |
|
|
|||||||||
| Other |
|
|
|||||||||
| Total deferred tax liabilities |
|
|
|||||||||
| Net deferred tax assets | $ |
|
$ |
|
|||||||
The effective tax rate was
19.40
% and
22.30
% for the year ended December 31, 2020 and 2019, respectively. The Company and its subsidiaries file a consolidated U.S. federal income tax return. The Company is currently open to audit under the statute of limitations by the Internal Revenue Service for the years ending December 31, 2017 through 2019. The Company and its subsidiaries’ state income tax returns are open to audit under the statute of limitations for the years ended December 31, 2017 through 2019.
The Company acquired federal and state net operating losses as part of its previous acquisitions, with varying expiration periods. The federal and state net operating losses acquired in the Brand acquisition were $
81,288
and $
55,067
, respectively, all created in 2018. As part of the 2017 Tax Cuts and Jobs Act and corresponding state tax laws, the federal net operating losses and the majority of the state net operating losses created by Brand during 2018 have an indefinite carryforward period. As of
135
Renasant Corporation and Subsidiaries
Notes to Consolidated Financial Statements
Note 15 – Income Taxes (continued)
December 31, 2020, there are state net operating losses without expiration periods, related to the Brand acquisition of $
24,622
. The federal net operating loss related to the Brand acquisition was fully utilized during 2020. The federal and state net operating losses acquired in the Heritage Financial Group, Inc. acquisition were $
18,321
and $
16,849
, respectively, of which $
3,029
and $
2,205
remain to be utilized as of December 31, 2020. These losses begin to expire in 2029 and are expected to be fully utilized. Because the benefits are expected to be fully realized, the Company recorded
no
valuation allowance against the net operating losses for the year ended December 31, 2020.
The table below presents the breakout of net operating losses as of the dates presented.
| December 31, | |||||||||||
| 2020 | 2019 | ||||||||||
| Net Operating Losses | |||||||||||
| Federal | $ |
|
$ |
|
|||||||
| State |
|
|
|||||||||
A reconciliation of the beginning and ending amount of unrecognized tax benefits, excluding interest, related to federal and state income tax matters as of December 31 follows below:
| 2020 | 2019 | 2018 | |||||||||||||||
| Balance at January 1 | $ |
|
$ |
|
$ |
|
|||||||||||
| Additions based on positions related to current period |
|
|
|
||||||||||||||
| Reductions based on positions related to prior period |
(
|
(
|
|
||||||||||||||
| Reductions due to lapse of statute of limitations |
(
|
|
|
||||||||||||||
| Balance at December 31 | $ |
|
$ |
|
$ |
|
|||||||||||
If ultimately recognized, the Company does not anticipate any material increase in the effective tax rate for 2020 relative to any tax positions taken prior to January 1, 2020. The Company had accrued $
18
, $
105
and $
244
for interest and penalties related to unrecognized tax benefits as of December 31, 2020, 2019 and 2018, respectively.
Note 16 –
Fair Value Measurements
(In Thousands)
Recurring Fair Value Measurements
The Company carries certain assets and liabilities at fair value on a recurring basis in accordance with applicable standards. The Company’s recurring fair value measurements are based on the requirement to carry such assets and liabilities at fair value or the Company’s election to carry certain eligible assets and liabilities at fair value. Assets and liabilities that are required to be carried at fair value include securities available for sale and derivative instruments. The Company has elected to carry mortgage loans held for sale at fair value on a recurring basis as permitted under the guidance in ASC 825.
The following methods and assumptions are used by the Company to estimate the fair values of the Company’s financial assets and liabilities that are measured on a recurring basis:
Securities available for sale
: Securities available for sale consist primarily of debt securities, such as obligations of U.S. Government agencies and corporations, mortgage backed securities, trust preferred securities and other debt securities. Where quoted market prices in active markets are available, securities are classified within Level 1 of the fair value hierarchy. If quoted prices from active markets are not available, fair values are based on quoted market prices for similar instruments traded in active markets, quoted market prices for identical or similar instruments traded in markets that are not active, or model-based valuation techniques where all significant assumptions are observable in the market. Such instruments are classified within Level 2 of the fair value hierarchy. When assumptions used in model-based valuation techniques are not observable in the market, the assumptions used by management reflect estimates of assumptions used by other market participants in determining fair value. When there is limited transparency around the inputs to the valuation, the instruments are classified within Level 3 of the fair value hierarchy.
136
Renasant Corporation and Subsidiaries
Notes to Consolidated Financial Statements
Note 16 – Fair Value Measurements (continued)
Derivative instruments
: Most of the Company’s derivative contracts are actively traded in over-the-counter markets and are valued using discounted cash flow models which incorporate observable market based inputs including current market interest rates, credit spreads, and other factors. Such instruments are categorized within Level 2 of the fair value hierarchy and include interest rate swaps and other interest rate contracts including interest rate caps and/or floors. The Company’s interest rate lock commitments are valued using current market prices for mortgage backed securities with similar characteristics, adjusted for certain factors including servicing and risk. The value of the Company’s forward commitments is based on current prices for securities backed by similar types of loans. Because these assumptions are observable in active markets, the Company’s interest rate lock commitments and forward commitments are categorized within Level 2 of the fair value hierarchy.
Mortgage loans held for sale in loans held for sale
: Mortgage loans held for sale are primarily agency loans which trade in active secondary markets. The fair value of these instruments is derived from current market pricing for similar loans, adjusted for differences in loan characteristics, including servicing and risk. Because the valuation is based on external pricing of similar instruments, mortgage loans held for sale are classified within Level 2 of the fair value hierarchy.
The following table presents assets and liabilities that are measured at fair value on a recurring basis as of the dates presented:
| Level 1 | Level 2 | Level 3 | Totals | ||||||||||||||||||||
| December 31, 2020 | |||||||||||||||||||||||
| Financial assets: | |||||||||||||||||||||||
| Securities available for sale: | |||||||||||||||||||||||
| Trust preferred securities | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
| Other available for sale securities |
|
|
|
|
|||||||||||||||||||
| Total securities available for sale |
|
|
|
|
|||||||||||||||||||
| Derivative instruments |
|
|
|
|
|||||||||||||||||||
| Mortgage loans held for sale in loans held for sale |
|
|
|
|
|||||||||||||||||||
| Total financial assets | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
| Financial liabilities: | |||||||||||||||||||||||
| Derivative instruments | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
| Level 1 | Level 2 | Level 3 | Totals | ||||||||||||||||||||
| December 31, 2019 | |||||||||||||||||||||||
| Financial assets: | |||||||||||||||||||||||
| Securities available for sale: | |||||||||||||||||||||||
| Trust preferred securities | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
| Other available for sale securities |
|
|
|
|
|||||||||||||||||||
| Total securities available for sale |
|
|
|
|
|||||||||||||||||||
| Derivative instruments |
|
|
|
|
|||||||||||||||||||
| Mortgage loans held for sale in loans held for sale |
|
|
|
|
|||||||||||||||||||
| Total financial assets | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
| Financial liabilities: | |||||||||||||||||||||||
| Derivative instruments | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
The Company reviews fair value hierarchy classifications on a quarterly basis. Changes in the Company’s ability to observe inputs to the valuation may cause reclassification of certain assets or liabilities within the fair value hierarchy.
137
Renasant Corporation and Subsidiaries
Notes to Consolidated Financial Statements
Note 16 – Fair Value Measurements (continued)
The following table provides for the periods presented a reconciliation for assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs, or Level 3 inputs:
| Securities available for sale | |||||
|
Trust preferred
securities |
|||||
| Balance at January 1, 2019 | $ |
|
|||
| Accretion included in net income |
|
||||
| Unrealized losses included in other comprehensive income |
(
|
||||
| Settlements |
(
|
||||
| Balance at December 31, 2019 | $ |
|
|||
| Accretion included in net income |
|
||||
| Unrealized losses included in other comprehensive income |
(
|
||||
| Settlements |
(
|
||||
| Balance at December 31, 2020 | $ |
|
|||
For 2020 and 2019, there were
no
gains or losses included in earnings that were attributable to the change in unrealized gains or losses related to assets or liabilities held at the end of each respective period that were measured on a recurring basis using significant unobservable inputs.
The following table presents information as of December 31, 2020 about significant unobservable inputs (Level 3) used in the valuation of assets and liabilities measured at fair value on a recurring basis:
| Financial instrument |
Fair
Value |
Valuation Technique |
Significant
Unobservable Inputs |
Range of Inputs | ||||||||||||||||||||||
| Trust preferred securities | $ |
|
Discounted cash flows | Default rate |
|
|||||||||||||||||||||
Nonrecurring Fair Value Measurements
Certain assets may be recorded at fair value on a nonrecurring basis. These nonrecurring fair value adjustments typically are a result of the application of the lower of cost or market accounting or a write-down occurring during the period. The following table provides as of the dates presented the fair value measurement for assets measured at fair value on a nonrecurring basis that were still held on the
Consolidated Balance Sheets at period end and the level within the fair value hierarchy each is classified:
| Level 1 | Level 2 | Level 3 | Totals | ||||||||||||||||||||
| December 31, 2020 | |||||||||||||||||||||||
|
Individually evaluated loans, net of allowance for credit losses
(1)
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
| OREO |
|
|
|
|
|||||||||||||||||||
| Mortgage servicing rights |
|
|
|
|
|||||||||||||||||||
| Total | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
| Level 1 | Level 2 | Level 3 | Totals | ||||||||||||||||||||
| December 31, 2019 | |||||||||||||||||||||||
|
Individually evaluated loans, net of allowance for credit losses
(1)
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
| OREO |
|
|
|
|
|||||||||||||||||||
| Mortgage servicing rights |
|
|
|
|
|||||||||||||||||||
| Total | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
(1)
Prior to the adoption of CECL on January 1, 2020, these loans were known as impaired loans.
138
Renasant Corporation and Subsidiaries
Notes to Consolidated Financial Statements
Note 16 – Fair Value Measurements (continued)
The following methods and assumptions are used by the Company to estimate the fair values of the Company’s assets measured on a nonrecurring basis:
Individually evaluated loans
: Loans are individually evaluated for credit losses each quarter taking into account the fair value of the collateral less estimated selling costs. Collateral may be real estate and/or business assets including but not limited to equipment, inventory and accounts receivable. The fair value of real estate is determined based on appraisals by qualified licensed appraisers. The fair value of the business assets is generally based on amounts reported on the business’s financial statements. Appraised and reported values may be adjusted based on changes in market conditions from the time of valuation and management’s knowledge of the client and the client’s business. Since not all valuation inputs are observable, these nonrecurring fair value determinations are classified as Level 3. Individually evaluated loans are reviewed and evaluated on at least a quarterly basis for additional impairment and adjusted accordingly, based on the same factors previously identified. Individually evaluated loans that were measured or re-measured at fair value had a carrying value of $
36,990
and $
29,606
at December 31, 2020 and December 31, 2019, respectively, and a reserve for these loans of $
12,845
and $
2,258
was included in the allowance for credit losses for the same periods.
Other real estate owned
: OREO is comprised of commercial and residential real estate obtained in partial or total satisfaction of loan obligations. OREO acquired in settlement of indebtedness is recorded at the fair value of the real estate less estimated costs to sell. Subsequently, it may be necessary to record nonrecurring fair value adjustments for declines in fair value. Fair value, when recorded, is determined based on appraisals by qualified licensed appraisers and adjusted for management’s estimates of costs to sell. Accordingly, values for OREO are classified as Level 3.
The following table presents, as of the dates presented, OREO measured at fair value on a nonrecurring basis that was still held in the Consolidated Balance Sheets at period-end:
| December 31, 2020 | December 31, 2019 | ||||||||||
| Carrying amount prior to remeasurement | $ |
|
$ |
|
|||||||
| Impairment recognized in results of operations |
(
|
(
|
|||||||||
| Fair value | $ |
|
$ |
|
|||||||
Mortgage servicing rights
: The Company retains the right to service certain mortgage loans that it sells to secondary market investors. Mortgage servicing rights are carried at the lower of amortized cost or fair value. Fair value is determined using an income approach with various assumptions including expected cash flows, market discount rates, prepayment speeds, servicing costs, and other factors. Because these factors are not all observable and include management's assumptions, mortgage servicing rights are classified within Level 3 of the fair value hierarchy. Mortgage servicing rights were carried at amortized cost at December 31, 2020 and December 31, 2019. There were $
11,726
and $
1,836
of negative valuation adjustments on MSRs during the twelve months ended December 31, 2020 and 2019, respectively.
139
Renasant Corporation and Subsidiaries
Notes to Consolidated Financial Statements
Note 16 – Fair Value Measurements (continued)
The following table presents information as of December 31, 2020 about significant unobservable inputs (Level 3) used in the valuation of assets measured at fair value on a nonrecurring basis:
| Financial instrument |
Fair
Value |
Valuation Technique |
Significant
Unobservable Inputs |
Range of Inputs | ||||||||||||||||||||||
|
Individually evaluated loans, net of allowance for credit losses
(1)
|
$ |
|
Appraised value of collateral less estimated costs to sell | Estimated costs to sell |
|
|||||||||||||||||||||
| OREO | $ |
|
Appraised value of property less estimated costs to sell | Estimated costs to sell |
|
|||||||||||||||||||||
(1)
Prior to the adoption of CECL on January 1, 2020, these loans were known as impaired loans.
Fair Value Option
The Company elected to measure all mortgage loans originated for sale on or after July 1, 2012 at fair value under the fair value option as permitted under ASC 825. Electing to measure these assets at fair value reduces certain timing differences and better matches the changes in fair value of the loans with changes in the fair value of derivative instruments used to economically hedge them.
Net gains of $
12,057
resulting from fair value changes of these mortgage loans were recorded in income during 2020, as compared to net gains of $
1,286
in 2019 and net gains of $
4,892
in 2018. The amounts do not reflect changes in fair values of related derivative instruments used to hedge exposure to market-related risks associated with these mortgage loans. The change in fair value of both mortgage loans held for sale and the related derivative instruments are recorded in “Mortgage banking income” in the Consolidated Statements of Income.
The Company’s valuation of mortgage loans held for sale incorporates an assumption for credit risk; however, given the short-term period that the Company holds these loans, valuation adjustments attributable to instrument-specific credit risk is nominal. Interest income on mortgage loans held for sale measured at fair value is accrued as it is earned based on contractual rates and is reflected in loan interest income on the Consolidated Statements of Income.
The following table summarizes the differences between the fair value and the principal balance for mortgage loans held for sale measured at fair value as of December 31, 2020:
|
Aggregate
Fair Value |
Aggregate
Unpaid Principal Balance |
Difference | |||||||||||||||
| Mortgage loans held for sale | $ |
|
$ |
|
$ |
|
|||||||||||
140
Renasant Corporation and Subsidiaries
Notes to Consolidated Financial Statements
Note 16 – Fair Value Measurements (continued)
Fair Value of Financial Instruments
The carrying amounts and estimated fair values of the Company’s financial instruments, including those assets and liabilities that are not measured and reported at fair value on a recurring basis or nonrecurring basis, were as follows as of the dates presented:
| Fair Value | |||||||||||||||||||||||||||||
|
Carrying
Value |
Level 1 | Level 2 | Level 3 | Total | |||||||||||||||||||||||||
| December 31, 2020 | |||||||||||||||||||||||||||||
| Financial assets | |||||||||||||||||||||||||||||
| Cash and cash equivalents | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||||||
| Securities available for sale |
|
|
|
|
|
||||||||||||||||||||||||
| Loans held for sale |
|
|
|
|
|
||||||||||||||||||||||||
| Loans, net |
|
|
|
|
|
||||||||||||||||||||||||
| Mortgage servicing rights |
|
|
|
|
|
||||||||||||||||||||||||
| Derivative instruments |
|
|
|
|
|
||||||||||||||||||||||||
| Financial liabilities | |||||||||||||||||||||||||||||
| Deposits | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||||||
| Short-term borrowings |
|
|
|
|
|
||||||||||||||||||||||||
| Federal Home Loan Bank advances |
|
|
|
|
|
||||||||||||||||||||||||
| Junior subordinated debentures |
|
|
|
|
|
||||||||||||||||||||||||
| Subordinated notes |
|
|
|
|
|
||||||||||||||||||||||||
| Derivative instruments |
|
|
|
|
|
||||||||||||||||||||||||
| Fair Value | |||||||||||||||||||||||||||||
|
Carrying
Value |
Level 1 | Level 2 | Level 3 | Total | |||||||||||||||||||||||||
| December 31, 2019 | |||||||||||||||||||||||||||||
| Financial assets | |||||||||||||||||||||||||||||
| Cash and cash equivalents | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||||||
| Securities available for sale |
|
|
|
|
|
||||||||||||||||||||||||
| Loans held for sale |
|
|
|
|
|
||||||||||||||||||||||||
| Loans, net |
|
|
|
|
|
||||||||||||||||||||||||
| Mortgage servicing rights |
|
|
|
|
|
||||||||||||||||||||||||
| Derivative instruments |
|
|
|
|
|
||||||||||||||||||||||||
| Financial liabilities | |||||||||||||||||||||||||||||
| Deposits | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||||||
| Short-term borrowings |
|
|
|
|
|
||||||||||||||||||||||||
| Federal Home Loan Bank advances |
|
|
|
|
|
||||||||||||||||||||||||
| Junior subordinated debentures |
|
|
|
|
|
||||||||||||||||||||||||
| Subordinated notes |
|
|
|
|
|
||||||||||||||||||||||||
| Derivative instruments |
|
|
|
|
|
||||||||||||||||||||||||
141
Renasant Corporation and Subsidiaries
Notes to Consolidated Financial Statements
Note 17 –
Other Comprehensive Income (Loss)
(In Thousands)
Changes in the components of other comprehensive income, net of tax, were as follows:
| Pre-Tax |
Tax Expense
(Benefit) |
Net of Tax | |||||||||||||||
| Year Ended December 31, 2020 | |||||||||||||||||
| Securities available for sale: | |||||||||||||||||
| Unrealized holding gains on securities | $ |
|
$ |
|
$ |
|
|||||||||||
|
Reclassification adjustment for gains realized in net income
(1)
|
(
|
(
|
(
|
||||||||||||||
| Total securities available for sale |
|
|
|
||||||||||||||
| Derivative instruments: | |||||||||||||||||
| Unrealized holding gains on derivative instruments |
|
|
|
||||||||||||||
| Reclassification adjustment for losses realized in net income related to swap termination |
|
|
|
||||||||||||||
| Total derivative instruments |
|
|
|
||||||||||||||
| Defined benefit pension and post-retirement benefit plans: | |||||||||||||||||
| Net gain arising during the period |
|
|
|
||||||||||||||
|
Reclassification adjustment for settlement loss related to the VERP realized in net income
(3)
|
|
|
|
||||||||||||||
|
New prior service cost
(3)
|
(
|
(
|
(
|
||||||||||||||
|
Amortization of net actuarial loss recognized in net periodic pension cost
(2)
|
|
|
|
||||||||||||||
|
Amortization of prior service cost
(3)
|
|
|
|
||||||||||||||
| Total defined benefit pension and post-retirement benefit plans |
|
|
|
||||||||||||||
| Total other comprehensive income | $ |
|
$ |
|
$ |
|
|||||||||||
| Year Ended December 31, 2019 | |||||||||||||||||
| Securities available for sale: | |||||||||||||||||
| Unrealized holding gains on securities | $ |
|
$ |
|
$ |
|
|||||||||||
|
Reclassification adjustment for losses realized in net income
(1)
|
|
|
|
||||||||||||||
| Total securities available for sale |
|
|
|
||||||||||||||
| Derivative instruments: | |||||||||||||||||
| Unrealized holding losses on derivative instruments |
(
|
(
|
(
|
||||||||||||||
| Total derivative instruments |
(
|
(
|
(
|
||||||||||||||
| Defined benefit pension and post-retirement benefit plans: | |||||||||||||||||
| Net gain arising during the period |
|
|
|
||||||||||||||
|
Amortization of net actuarial loss recognized in net periodic pension cost
(2)
|
|
|
|
||||||||||||||
| Total defined benefit pension and post-retirement benefit plans |
|
|
|
||||||||||||||
| Total other comprehensive income | $ |
|
$ |
|
$ |
|
|||||||||||
142
Renasant Corporation and Subsidiaries
Notes to Consolidated Financial Statements
Note 17 – Other Comprehensive Income (Loss) (continued)
| Pre-Tax |
Tax Expense
(Benefit) |
Net of Tax | |||||||||||||||
| Year Ended December 31, 2018 | |||||||||||||||||
| Securities available for sale: | |||||||||||||||||
| Unrealized holding losses on securities | $ |
(
|
$ |
(
|
$ |
(
|
|||||||||||
|
Reclassification adjustment for losses realized in net income
(1)
|
|
|
|
||||||||||||||
| Total securities available for sale |
(
|
(
|
(
|
||||||||||||||
| Derivative instruments: | |||||||||||||||||
| Unrealized holding gains on derivative instruments |
|
|
|
||||||||||||||
| Total derivative instruments |
|
|
|
||||||||||||||
| Defined benefit pension and post-retirement benefit plans: | |||||||||||||||||
| Net gain arising during the period |
|
|
|
||||||||||||||
|
Amortization of net actuarial loss recognized in net periodic pension cost
(2)
|
|
|
|
||||||||||||||
| Total defined benefit pension and post-retirement benefit plans |
|
|
|
||||||||||||||
| Total other comprehensive loss | $ |
(
|
$ |
(
|
$ |
(
|
|||||||||||
(1) Included in Net gains (losses) on sales of securities in the Consolidated Statements of Income
(2) Included in Salaries and employee benefits in the Consolidated Statements of Income
(3) Included in Restructuring charges in the Consolidated Statements of Income
The accumulated balances for each component of other comprehensive income (loss), net of tax, at December 31 were as follows:
| 2020 | 2019 | 2018 | |||||||||||||||
| Unrealized gains on securities | $ |
|
$ |
|
$ |
|
|||||||||||
| Non-credit related portion of other-than-temporary impairment on securities |
(
|
(
|
(
|
||||||||||||||
| Unrealized losses on derivative instruments |
(
|
(
|
(
|
||||||||||||||
| Unrecognized losses on defined benefit pension and post-retirement benefit plans obligations |
(
|
(
|
(
|
||||||||||||||
| Total accumulated other comprehensive income (loss) | $ |
|
$ |
|
$ |
(
|
|||||||||||
143
Renasant Corporation and Subsidiaries
Notes to Consolidated Financial Statements
Note 18 –
Quarterly Results of Operations
(In Thousands, Except Share Data) (Unaudited)
The following table sets forth a summary of the unaudited quarterly results of operations.
|
First
Quarter |
Second
Quarter |
Third
Quarter |
Fourth
Quarter |
||||||||||||||||||||
| 2020 | |||||||||||||||||||||||
| Interest income | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
| Interest expense |
|
|
|
|
|||||||||||||||||||
| Net interest income |
|
|
|
|
|||||||||||||||||||
| Provision for credit losses |
|
|
|
|
|||||||||||||||||||
| Noninterest income |
|
|
|
|
|||||||||||||||||||
| Noninterest expense |
|
|
|
|
|||||||||||||||||||
| Income before income taxes |
|
|
|
|
|||||||||||||||||||
| Income taxes |
|
|
|
|
|||||||||||||||||||
| Net income | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
| Basic earnings per share | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
| Diluted earnings per share | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
| 2019 | |||||||||||||||||||||||
| Interest income | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
| Interest expense |
|
|
|
|
|||||||||||||||||||
| Net interest income |
|
|
|
|
|||||||||||||||||||
| Provision for credit losses |
|
|
|
|
|||||||||||||||||||
| Noninterest income |
|
|
|
|
|||||||||||||||||||
| Noninterest expense |
|
|
|
|
|||||||||||||||||||
| Income before income taxes |
|
|
|
|
|||||||||||||||||||
| Income taxes |
|
|
|
|
|||||||||||||||||||
| Net income | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
| Basic earnings per share | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
| Diluted earnings per share | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
Note 19 –
Net Income Per Common Share
(In Thousands, Except Share Data)
Basic net income per common share is calculated by dividing net income by the weighted-average number of common shares outstanding for the period. Diluted net income per common share reflects the pro forma dilution of shares outstanding, assuming outstanding stock options were exercised into common shares and nonvested restricted stock awards, whose vesting is subject to future service requirements, were outstanding common shares as of the awards’ respective grant dates, calculated in accordance with the treasury method.
144
Renasant Corporation and Subsidiaries
Notes to Consolidated Financial Statements
Note 19 – Net Income Per Common Share (continued)
Basic and diluted net income per common share calculations are as follows for the periods presented:
| Year Ended December 31, | |||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||
| Basic | |||||||||||||||||
| Net income applicable to common stock | $ |
|
$ |
|
$ |
|
|||||||||||
| Average common shares outstanding |
|
|
|
||||||||||||||
| Net income per common share—basic | $ |
|
$ |
|
$ |
|
|||||||||||
| Diluted | |||||||||||||||||
| Net income applicable to common stock | $ |
|
$ |
|
$ |
|
|||||||||||
| Average common shares outstanding |
|
|
|
||||||||||||||
| Effect of dilutive stock-based compensation |
|
|
|
||||||||||||||
| Average common shares outstanding—diluted |
|
|
|
||||||||||||||
| Net income per common share—diluted | $ |
|
$ |
|
$ |
|
|||||||||||
Outstanding stock-based compensation awards that could potentially dilute basic net income per common share in the future that were not included in the computation of diluted net income per common share due to their anti-dilutive effect were as follows for the periods presented:
| Year Ended | |||||||||||||||||
| December 31, | |||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||
| Number of shares |
|
|
|
||||||||||||||
| Range of exercise prices (for stock option awards) |
|
|
|
||||||||||||||
Note 20 –
Commitments, Contingent Liabilities and Financial Instruments with Off-Balance Sheet Risk
(In Thousands)
Loan commitments are made to accommodate the financial needs of the Company’s customers. Standby letters of credit commit the Company to make payments on behalf of customers when certain specified future events occur. Both arrangements have credit risk essentially the same as that involved in extending loans to customers and are subject to the Company’s normal credit policies. Collateral (e.g., securities, receivables, inventory, equipment, etc.) is obtained based on management’s credit assessment of the customer. The Company’s unfunded loan commitments (unfunded loans and unused lines of credit) and standby letters of credit outstanding at December 31, 2020 were $
2,749,988
and $
90,597
, respectively, compared to $
2,324,262
and $
94,824
, respectively, at December 31, 2019.
Various claims and lawsuits are pending against the Company and Renasant Bank. In the opinion of management, after consultation with legal counsel, resolution of these matters is not expected to have a material effect on the consolidated financial statements.
Market risk resulting from interest rate changes on particular off-balance sheet financial instruments may be offset by other on - or off-balance sheet transactions. Interest rate sensitivity is monitored by the Company for determining the net effect of potential changes in interest rates on the market value of both on- and off-balance sheet financial instruments.
Note 21 –
Restrictions on Cash, Securities, Bank Dividends, Loans or Advances
(In Thousands)
In prior years Renasant Bank has been required to maintain minimum average balances with the Federal Reserve. In March 2020, the Federal Reserve announced that effective March 26, 2020 the reserve requirement would be reduced to zero. This action was taken to support the flow of credit to households and businesses in response to the economic environment caused by the COVID-19 pandemic. At December 31, 2019, Renasant Bank’s reserve requirement with the Federal Reserve was $
187,839
, with which it was in full compliance.
145
Renasant Corporation and Subsidiaries
Notes to Consolidated Financial Statements
Note 21 – Restrictions on Cash, Securities, Bank Dividends, Loans or Advances (continued)
The Company’s balance of FHLB stock, which is carried at amortized cost, at December 31, 2020 and 2019, was $
12,252
and $
31,092
, respectively. The required investment for the same time period was $
11,594
and $
31,092
, respectively.
The Company’s ability to pay dividends to its shareholders is substantially dependent on the ability of Renasant Bank to transfer funds to the Company in the form of dividends, loans and advances. Under Mississippi law, a Mississippi bank with earned surplus in excess of three times capital stock may pay a dividend, subject to the approval of the Mississippi Department of Banking and Consumer Finance (the “DBCF”). In addition, the FDIC has the authority to prohibit the Bank from engaging in business practices that the FDIC considers to be unsafe or unsound, which, depending on the financial condition of the Bank, could include the payment of dividends. Accordingly, the approval of the DBCF is required prior to Renasant Bank paying dividends to the Company, and under certain circumstances the approval of the FDIC may be required. At December 31, 2020, the Bank’s earned surplus exceeded the Bank’s capital stock by more than
ten
times.
Note 22 –
Regulatory Matters
(In Thousands)
The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on the Company’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. Capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.
The Federal Reserve, the FDIC and the Office of the Comptroller of the Currency have issued guidelines governing the levels of capital that bank holding companies and banks must maintain. Those guidelines specify capital tiers, which include the following classifications:
| Capital Tiers |
Tier 1 Capital to
Average Assets (Leverage) |
Common Equity Tier 1 to
Risk - Weighted Assets |
Tier 1 Capital to
Risk – Weighted Assets |
Total Capital to
Risk – Weighted Assets |
|||||||||||||||||||
| Well capitalized |
|
|
|
|
|||||||||||||||||||
| Adequately capitalized |
|
|
|
|
|||||||||||||||||||
| Undercapitalized |
Less than
|
Less than
|
Less than
|
Less than
|
|||||||||||||||||||
| Significantly undercapitalized |
Less than
|
Less than
|
Less than
|
Less than
|
|||||||||||||||||||
| Critically undercapitalized |
Tangible Equity / Total Assets less than
|
||||||||||||||||||||||
146
Renasant Corporation and Subsidiaries
Notes to Consolidated Financial Statements
Note 22 – Regulatory Matters (continued)
The following table provides the capital and risk-based capital and leverage ratios for the Company and for Renasant Bank as of December 31:
| 2020 | 2019 | ||||||||||||||||||||||
| Amount | Ratio | Amount | Ratio | ||||||||||||||||||||
| Renasant Corporation | |||||||||||||||||||||||
| Tier 1 Capital to Average Assets (Leverage) | $ |
|
|
% | $ |
|
|
% | |||||||||||||||
| Common Equity Tier 1 Capital to Risk-Weighted Assets |
|
|
% |
|
|
% | |||||||||||||||||
| Tier 1 Capital to Risk-Weighted Assets |
|
|
% |
|
|
% | |||||||||||||||||
| Total Capital to Risk-Weighted Assets |
|
|
% |
|
|
% | |||||||||||||||||
| Renasant Bank | |||||||||||||||||||||||
| Tier 1 Capital to Average Assets (Leverage) | $ |
|
|
% | $ |
|
|
% | |||||||||||||||
| Common Equity Tier 1 Capital to Risk-Weighted Assets |
|
|
% |
|
|
% | |||||||||||||||||
| Tier 1 Capital to Risk-Weighted Assets |
|
|
% |
|
|
% | |||||||||||||||||
| Total Capital to Risk-Weighted Assets |
|
|
% |
|
|
% | |||||||||||||||||
Common equity Tier 1 capital (“CET1”) generally consists of common stock, retained earnings, accumulated other comprehensive income and certain minority interests, less certain adjustments and deductions. In addition, the Company must maintain a “capital conservation buffer,” which is a specified amount of CET1 in addition to the amount necessary to meet minimum risk-based capital requirements. The capital conservation buffer is designed to absorb losses during periods of economic stress. If the Company’s ratio of CET1 to risk-weighted capital is below the capital conservation buffer, the Company will face restrictions on its ability to pay dividends, repurchase outstanding stock and make certain discretionary bonus payments. The required capital conservation buffer is 2.5% of CET1 to risk-weighted assets in addition to the amount necessary to meet minimum risk-based capital requirements.
In addition, the Federal Reserve, the FDIC and the Office of the Comptroller of the Currency rules for calculating risk-weighted assets have been revised in recent years to enhance risk sensitivity and to incorporate certain international capital standards of the Basel Committee on Banking Supervision. These revisions affect the calculation of the denominator of a banking organization’s risk-based capital ratios to reflect the higher-risk nature of certain types of loans. For example, residential mortgages are risk-weighted between 35% and 200%, depending on the mortgage’s loan-to-value ratio and whether the mortgage falls into one of two categories based on eight criteria that include, among others, the term, use of negative amortization and balloon payments, certain rate increases and documented and verified borrower income, while a 150% risk weight applies to both certain high volatility commercial real estate acquisition, development and construction loans as well as non-residential mortgage loans 90 days past due or on nonaccrual status (in both cases, as opposed to the former 100% risk weight). Also, “hybrid” capital items like trust preferred securities no longer enjoy Tier 1 capital treatment, subject to various grandfathering and transition rules.
As previously disclosed, the Company adopted CECL as of January 1, 2020. The Company has elected to take advantage of transitional relief offered by the Federal Reserve and the FDIC to delay for two years the estimated impact of CECL on regulatory capital, followed by a three-year transitional period to phase out the capital benefit provided by the two-year delay.
147
Renasant Corporation and Subsidiaries
Notes to Consolidated Financial Statements
Note 23 –
Segment Reporting
(In Thousands)
The operations of the Company’s reportable segments are described as follows:
•
The Community Banks segment delivers a complete range of banking and financial services to individuals and small to medium-size businesses including checking and savings accounts, business and personal loans, asset-based lending and equipment leasing, as well as safe deposit and night depository facilities.
•
The Insurance segment includes a full service insurance agency offering all major lines of commercial and personal insurance through major carriers.
•
The Wealth Management segment, through the Trust division, offers a broad range of fiduciary services including the administration (as trustee or in other fiduciary or representative capacities) of benefit plans, management of trust accounts, inclusive of personal and corporate benefit accounts and custodial accounts, as well as accounting and money management for trust accounts. In addition, the Wealth Management segment, through the Financial Services division, provides specialized products and services to customers, which include fixed and variable annuities, mutual funds and other investment services through a third party broker-dealer.
In order to give the Company’s divisional management a more precise indication of the income and expenses they can control, the results of operations for the Community Banks, the Insurance and the Wealth Management segments reflect the direct revenues and expenses of each respective segment. Indirect revenues and expenses, including but not limited to income from the Company’s investment portfolio, as well as certain costs associated with data processing and back office functions, primarily support the operations of the community banks and, therefore, are included in the results of the Community Banks segment. Included in “Other” are the operations of the holding company and other eliminations which are necessary for purposes of reconciling to the consolidated amounts.
148
Renasant Corporation and Subsidiaries
Notes to Consolidated Financial Statements
Note 23 – Segment Reporting (continued)
The following table provides financial information for the Company’s operating segments as of and for the years ended December 31, 2020, 2019 and 2018:
|
Community
Banks |
Insurance |
Wealth
Management |
Other | Consolidated | |||||||||||||||||||||||||
| 2020 | |||||||||||||||||||||||||||||
| Net interest income | $ |
|
$ |
|
$ |
|
$ |
(
|
$ |
|
|||||||||||||||||||
| Provision for credit losses |
|
|
|
|
|
||||||||||||||||||||||||
| Noninterest income |
|
|
|
(
|
|
||||||||||||||||||||||||
| Noninterest expense |
|
|
|
|
|
||||||||||||||||||||||||
| Income before income taxes |
|
|
|
(
|
|
||||||||||||||||||||||||
| Income taxes |
|
|
|
(
|
|
||||||||||||||||||||||||
| Net income (loss) | $ |
|
$ |
|
$ |
|
$ |
(
|
$ |
|
|||||||||||||||||||
| Total assets | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||||||
| Goodwill |
|
|
|
|
|
||||||||||||||||||||||||
| 2019 | |||||||||||||||||||||||||||||
| Net interest income | $ |
|
$ |
|
$ |
|
$ |
(
|
$ |
|
|||||||||||||||||||
| Provision for credit losses |
|
|
|
|
|
||||||||||||||||||||||||
| Noninterest income |
|
|
|
(
|
|
||||||||||||||||||||||||
| Noninterest expense |
|
|
|
|
|
||||||||||||||||||||||||
| Income before income taxes |
|
|
|
(
|
|
||||||||||||||||||||||||
| Income taxes |
|
|
|
(
|
|
||||||||||||||||||||||||
| Net income (loss) | $ |
|
$ |
|
$ |
|
$ |
(
|
$ |
|
|||||||||||||||||||
| Total assets | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||||||
| Goodwill |
|
|
|
|
|
||||||||||||||||||||||||
| 2018 | |||||||||||||||||||||||||||||
| Net interest income | $ |
|
$ |
|
$ |
|
$ |
(
|
$ |
|
|||||||||||||||||||
| Provision for credit losses |
|
|
|
|
|
||||||||||||||||||||||||
| Noninterest income |
|
|
|
(
|
|
||||||||||||||||||||||||
| Noninterest expense |
|
|
|
|
|
||||||||||||||||||||||||
| Income before income taxes |
|
|
|
(
|
|
||||||||||||||||||||||||
| Income taxes |
|
|
|
(
|
|
||||||||||||||||||||||||
| Net income (loss) | $ |
|
$ |
|
$ |
|
$ |
(
|
$ |
|
|||||||||||||||||||
| Total assets | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||||||
| Goodwill |
|
|
|
|
|
||||||||||||||||||||||||
149
Renasant Corporation and Subsidiaries
Notes to Consolidated Financial Statements
Note 24 –
Renasant Corporation (Parent Company Only) Condensed Financial Information
(In Thousands)
Balance Sheets
|
|
December 31, | ||||||||||
| 2020 | 2019 | ||||||||||
| Assets | |||||||||||
|
Cash and cash equivalents
(1)
|
$ |
|
$ |
|
|||||||
| Investments |
|
|
|||||||||
|
Investment in bank subsidiary
(2)
|
|
|
|||||||||
|
Accrued interest receivable on bank balances
(2)
|
|
|
|||||||||
|
Intercompany receivable
(2)
|
|
|
|||||||||
| Other assets |
|
|
|||||||||
| Total assets | $ |
|
$ |
|
|||||||
| Liabilities and shareholders’ equity | |||||||||||
| Junior subordinated debentures | $ |
|
$ |
|
|||||||
| Subordinated notes |
|
|
|||||||||
| Other liabilities |
|
|
|||||||||
| Shareholders’ equity |
|
|
|||||||||
| Total liabilities and shareholders’ equity | $ |
|
$ |
|
|||||||
(1)
Eliminates in consolidation, with the exception of $
844
and $
3,840
, in 2020 and 2019, respectively, pledged for collateral and held at non-subsidiary bank
(2)
Eliminates in consolidation
Statements of Income
|
|
Year Ended December 31, | ||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||
| Income | |||||||||||||||||
|
Dividends from bank subsidiary
(1)
|
$ |
|
$ |
|
$ |
|
|||||||||||
|
Interest income from bank subsidiary
(1)
|
|
|
|
||||||||||||||
| Other dividends |
|
|
|
||||||||||||||
| Other income |
|
|
|
||||||||||||||
| Total income |
|
|
|
||||||||||||||
| Expenses |
|
|
|
||||||||||||||
| Income before income tax benefit and equity in undistributed net income of bank subsidiary |
|
|
|
||||||||||||||
| Income tax benefit |
(
|
(
|
(
|
||||||||||||||
|
Equity in undistributed net income of bank subsidiary
(1)
|
|
|
|
||||||||||||||
| Net income | $ |
|
$ |
|
$ |
|
|||||||||||
(1)
Eliminates in consolidation
150
Renasant Corporation and Subsidiaries
Notes to Consolidated Financial Statements
Note 24 – Renasant Corporation (Parent Company Only) Condensed Financial Information (continued)
Statements of Cash Flows
|
|
Year Ended December 31, | ||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||
| Operating activities | |||||||||||||||||
| Net income | $ |
|
$ |
|
$ |
|
|||||||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||||||||
| Equity in undistributed net income of bank subsidiary |
(
|
(
|
(
|
||||||||||||||
| Amortization/depreciation/accretion |
|
(
|
|
||||||||||||||
| (Increase) decrease in other assets |
(
|
(
|
|
||||||||||||||
| Increase (decrease) in other liabilities |
|
|
(
|
||||||||||||||
| Net cash provided by operating activities |
|
|
|
||||||||||||||
| Investing activities | |||||||||||||||||
| Purchases of securities held to maturity and available for sale |
(
|
|
|
||||||||||||||
| Sales and maturities of securities held to maturity and available for sale |
|
|
|
||||||||||||||
| Net cash paid in acquisition |
|
|
(
|
||||||||||||||
| Other investing activities |
|
|
|
||||||||||||||
| Net cash (used in) provided by investing activities |
(
|
|
(
|
||||||||||||||
| Financing activities | |||||||||||||||||
| Cash paid for dividends |
(
|
(
|
(
|
||||||||||||||
| Cash received on exercise of stock-based compensation |
|
|
|
||||||||||||||
| Repurchase of shares in connection with stock repurchase program |
(
|
(
|
(
|
||||||||||||||
| Repayment of long-term debt |
|
(
|
|
||||||||||||||
| Proceeds from issuance of long-term debt |
|
|
|
||||||||||||||
| Other financing activities |
|
|
(
|
||||||||||||||
| Net cash provided by (used in) financing activities |
|
(
|
(
|
||||||||||||||
| Increase (decrease) in cash and cash equivalents |
|
(
|
(
|
||||||||||||||
| Cash and cash equivalents at beginning of year |
|
|
|
||||||||||||||
| Cash and cash equivalents at end of year | $ |
|
$ |
|
$ |
|
|||||||||||
Note 25 –
Leases
(In Thousands)
The Company enters into leases in both lessor and lessee capacities.
Lessor Arrangements
As of December 31, 2020 and 2019, the net investment in these leases was $
20,804
and $
12,441
, comprised of $
16,012
and $
10,735
in lease receivables, $
7,532
and $
2,739
in residual balances and $
2,740
and $
1,033
in deferred income, respectively. In order to mitigate potential exposure to residual asset risk, the Company utilizes first amendment or terminal rental adjustment clause leases.
For the twelve months ended December 31, 2020 and 2019, the Company generated $
554
and $
331
in income from these leases, respectively, which is included in interest income on loans on the Consolidated Statements of Income.
151
Renasant Corporation and Subsidiaries
Notes to Consolidated Financial Statements
Note 25 – Leases (continued)
The maturities of the lessor arrangements outstanding at December 31, 2020 is presented in the table below.
| 2021 | $ |
|
|||
| 2022 |
|
||||
| 2023 |
|
||||
| 2024 |
|
||||
| 2025 |
|
||||
| Thereafter |
|
||||
| Total lease receivables | $ |
|
|||
Lessee Arrangements
As of December 31, 2020 and 2019, right-of-use
totaled $
66,023
and $
84,754
and lease
totaled $
69,549
and $
88,494
, respectively.
The table below provides the components of lease cost and supplemental information for the periods presented.
| Year ended December 31, | |||||||||||
| 2020 | 2019 | ||||||||||
| Operating lease cost (cost resulting from lease payments) | $ |
|
$ |
|
|||||||
| Short-term lease cost |
|
|
|||||||||
| Variable lease cost (cost excluded from lease payments) |
|
|
|||||||||
| Sublease income |
(
|
(
|
|||||||||
| Net lease cost | $ |
|
$ |
|
|||||||
| Operating lease - operating cash flows (fixed payments) |
|
|
|||||||||
| Operating lease - operating cash flows (liability reduction) |
|
|
|||||||||
| Weighted average lease term - operating leases (in years) (at period end) |
|
|
|||||||||
| Weighted average discount rate - operating leases (at period end) |
|
% |
|
% | |||||||
| Right-of-use assets obtained in exchange for new lease liabilities - operating leases | $ |
|
$ |
|
|||||||
The maturities of the lessee arrangements outstanding at December 31, 2020 are presented in the table below.
| 2021 | $ |
|
|||
| 2022 |
|
||||
| 2023 |
|
||||
| 2024 |
|
||||
| 2025 |
|
||||
| Thereafter |
|
||||
| Total undiscounted cash flows |
|
||||
| Discount on cash flows |
|
||||
| Total operating lease liabilities | $ |
|
|||
Rental expense was $
10,044
, $
9,159
, and $
6,157
for 2020, 2019, and 2018, respectively.
For more information on lease accounting, see Note 1, “Significant Accounting Policies” and on lease financing receivables, see Note 3, “Non Purchased Loans.”
152
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Based upon their evaluation as of December 31, 2020, our Principal Executive Officer and Principal Financial Officer have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) are effective for ensuring that information the Company is required to disclose in reports that it files or submits under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to the Company’s management, including its Principal Executive and Principal Financial Officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
Management’s Annual Report on Internal Control over Financial Reporting and Attestation Report of the Independent Registered Public Accounting Firm
The information required to be provided pursuant to this item is set forth under the headings “Report on Management’s Assessment of Internal Control over Financial Reporting” and “Reports of Independent Registered Public Accounting Firm” in Item 8, Financial Statements and Supplementary Data, in this report.
Changes in Internal Control over Financial Reporting
There were no changes to internal control over financial reporting during the fourth quarter of 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Executive Officers of the Company
The information appearing under the heading “Executive Officers” in the Company’s Definitive Proxy Statement for its 2021 Annual Meeting of Shareholders is incorporated herein by reference.
Code of Ethics
The Company has adopted a code of business conduct and ethics in compliance with Item 406 of Regulation S-K that applies to the Company’s principal executive officer, principal financial officer and principal accounting officer. The Company’s Code of Ethics is available on its website at www.renasant.com by clicking on “Corporate Governance,” then “Documents & Charters” and then “Code of Business Conduct and Ethics.” Any person may request a free copy of the Code of Business Conduct and Ethics from the Company by sending a request to the following address: Renasant Corporation, 209 Troy Street, Tupelo, Mississippi, 38804-4827, Attention: General Counsel. The Company intends to satisfy the disclosure requirement under Item 5.05 of Form 8-K regarding an amendment to, or waiver from, a provision of the Company’s Code of Business Conduct and Ethics by posting such information on its website, at the address specified above.
Directors of the Company, Shareholder Recommendations of Director Candidates, Audit Committee Members and Delinquent Section 16(a) Reports
The information appearing under the headings “Corporate Governance and the Board of Directors,” “Board Members and Compensation - Members of the Board of Directors” and “Stock Ownership - Delinquent Section 16(a) Reports” in the Company’s Definitive Proxy Statement for its 2021 Annual Meeting of Shareholders is incorporated herein by reference.
153
ITEM 11. EXECUTIVE COMPENSATION
The information appearing under the headings “Corporate Governance and the Board of Directors - Role of the Board in Risk Oversight,” “Board Members and Compensation - Director Compensation,” “Compensation Discussion and Analysis,” “Compensation Committee Report,” “Compensation Committee Interlocks and Insider Participation” and “Compensation Tables” in the Company’s Definitive Proxy Statement for its 2021 Annual Meeting of Shareholders is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information appearing under the heading “Stock Ownership” in the Company’s Definitive Proxy Statement for its 2021 Annual Meeting of Shareholders is incorporated herein by reference.
Equity Compensation Plan Information
The table below reports outstanding options, warrants and rights granted under plans approved by our shareholders and plans or arrangements that were not approved by our shareholders, as of December 31, 2020. These plans and arrangements are:
•
Shareholder-Approved Plans
: We have two shareholder-approved equity compensation plans: (1) the 2020 Long-Term Incentive Compensation Plan (the “2020 LTIP”) and (2) the 2011 Long-Term Incentive Compensation Plan, which expires on April 19, 2021 but under which the Company ceased making grants or other awards upon our shareholders’ adoption of the 2020 LTIP on April 27, 2020. As of December 31, 2020, an aggregate of 681,243 shares of unvested restricted stock and options to purchase an aggregate of 10,500 shares of our common stock remained outstanding under both plans.
•
Non-Shareholder Approved Plans and Arrangements
: The only equity compensation plan or arrangement currently in force that was not approved by our shareholders is our Deferred Stock Unit Plan. Under this plan, deferred compensation is used to “purchase” units representing shares of our common stock at fair market value. An aggregate of 317,500 shares of Company common stock are reserved for issuance; as of December 31, 2020, units representing an aggregate of 294,922 shares of common stock were allocated to accounts, some of which has been distributed in the form of common stock.
|
Equity Compensation Plan Information
(at December 31, 2020) |
|||||||||||
| Plan Category | (a) Number of securities to be issued upon exercise of outstanding options, warrants and rights |
(b) Weighted-average exercise price of outstanding options, warrants and rights
(1)
|
(c) Number of securities remaining available for future issuance under equity compensation plans (excluding securities in column (a)) | ||||||||
| Equity compensation plans approved by security holders | 10,500 | $14.96 | 1,758,149 | ||||||||
| Equity compensation plans not approved by security holders | — | — | 22,577 | ||||||||
| Total | 10,500 | $14.96 | 1,780,726 | ||||||||
(1)
Does not take into account units allocated under the DSU Plan.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information appearing under the heading “Corporate Governance and Board of Directors” in the Company’s Definitive Proxy Statement for its 2021 Annual Meeting of Shareholders is incorporated herein by reference.
154
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information appearing under the heading “Independent Registered Public Accountants” in the Company’s Definitive Proxy Statement for its 2021 Annual Meeting of Shareholders is incorporated herein by reference.
155
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
|
(a) - (1) Financial Statements
|
||||||||
|
The following consolidated financial statements and supplementary information for the fiscal years ended December 31, 2020, 2019 and 2018 are included in Part II, Item 8, Financial Statements and Supplementary Data, in this report:
|
||||||||
| (i) | ||||||||
| (ii) | ||||||||
| (iii) | ||||||||
| (iv) | ||||||||
| (v) | ||||||||
| (vi) | ||||||||
| (vii) | ||||||||
| (viii) | ||||||||
|
(a) - (2) Financial Statement Schedules
|
||||||||
|
All schedules have been omitted because they are either not applicable or the required information has been included in the consolidated financial statements or notes thereto.
|
||||||||
|
(a) - (3) Exhibits required by Item 601 of Regulation S-K
|
||||||||
| (2)(i) |
Agreement and Plan of Merger by and among Renasant Corporation, Renasant Bank, Metropolitan BancGroup, Inc. and Metropolitan Bank dated as of January 17, 2017, filed as exhibit 2.1 to the Form 8-K of the Company filed with the
Securities and Exchange
Commission
(
the
“
Commission
”
)
on January 19, 2017 and incorporated herein by reference.
|
|||||||
| (2)(ii) | ||||||||
| (3)(i) | ||||||||
| (3)(ii) | ||||||||
| (4)(i) | ||||||||
| (4)(ii) | ||||||||
| (4)(iii) | ||||||||
| (4)(iv) | ||||||||
| (4)(v) | ||||||||
| 4(vi) | ||||||||
| (4)(vii) | ||||||||
| (4)(viii) | ||||||||
| (4)(ix) | ||||||||
156
| (4)(x) | ||||||||
| (10)(i) | ||||||||
| (10)(ii) | ||||||||
| (10)(iii) | ||||||||
| (10)(iv) | ||||||||
| (10)(v) | ||||||||
| (10)(vi) | ||||||||
| (10)(vii) | ||||||||
| (10)(viii) | ||||||||
| (10)(ix) | ||||||||
| (10)(x) | ||||||||
| (10)(xi) | ||||||||
| (10)(xii) | ||||||||
| (10)(xiii) | ||||||||
| (10)(xiv) | ||||||||
| (10)(xv) | ||||||||
| (10)(xvi) | ||||||||
| (10)(xvii) | ||||||||
| (10)(xviii) | ||||||||
157
| (10)(xix) | ||||||||
| (10)(xx) | ||||||||
| (10)(xxi) | ||||||||
| (10)(xxii) | ||||||||
| (10)(xxiii) | ||||||||
| (10)(xxiv) | ||||||||
| (10)(xxv) | ||||||||
| (10)(xxvi) | ||||||||
| (10)(xxvii) | ||||||||
| (10)(xxviii) | ||||||||
| (10)(xxix) | ||||||||
| (10)(xxx) | ||||||||
| (10)(xxxi) | ||||||||
| (10)(xxxii) | ||||||||
| (10)(xxxiii) | ||||||||
| (10)(xxxiv) | ||||||||
| (21) | ||||||||
| (23) | ||||||||
| (31)(i) | ||||||||
| (31)(ii) | ||||||||
| (32)(i) | ||||||||
158
| (32)(ii) | ||||||||
| (101) | The following materials from Renasant Corporation’s Annual Report on Form 10-K for the year ended December 31, 2020 were formatted in Inline XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets as of December 31, 2020 and December 31, 2019, (ii) Consolidated Statements of Income for the years ended December 31, 2020, 2019 and 2018, (iii) Consolidated Statements of Comprehensive Income for the years ended December 31, 2020, 2019 and 2018, (iv) Consolidated Statements of Changes in Shareholders’ Equity for the years ended December 31, 2020, 2019 and 2018, (v) Consolidated Statements of Cash Flows for the years ended December 31, 2020, 2019 and 2018 and (vi) Notes to Consolidated Financial Statements. | |||||||
| (104) | The cover page of Renasant Corporation’s Annual Report on Form 10-K for the year ended December 31, 2020, formatted in Inline XBRL (included in Exhibit 101). | |||||||
| * | Management contract or compensatory plan or arrangement required to be filed as an exhibit to this Form 10-K pursuant to Item 15(b) of Form 10-K. | ||||
The Company does not have any long-term debt instruments under which securities are authorized exceeding ten percent of the total assets of the Company and its subsidiaries on a consolidated basis. The Company will furnish to the Securities and Exchange Commission, upon its request, a copy of all long-term debt instruments.
159
ITEM 16. FORM 10-K SUMMARY
None.
160
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| RENASANT CORPORATION | |||||||||||||||||
| Date: | February 26, 2021 | by: | /s/ C. Mitchell Waycaster | ||||||||||||||
| C. Mitchell Waycaster | |||||||||||||||||
| President and | |||||||||||||||||
| Chief Executive Officer | |||||||||||||||||
| Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated. | |||||||||||||||||
| Date: | February 26, 2021 | by: |
/s/ James C. Mabry IV
|
||||||||||||||
| James C. Mabry IV | |||||||||||||||||
| Chief Financial Officer | |||||||||||||||||
| (Principal Financial Officer) | |||||||||||||||||
| Date: | February 26, 2021 | by: |
/s/ Kelly W. Hutcheson
|
||||||||||||||
| Kelly W. Hutcheson | |||||||||||||||||
| Chief Accounting Officer | |||||||||||||||||
| (Principal Accounting Officer) | |||||||||||||||||
| Date: | February 26, 2021 | by: | /s/ Gary D. Butler | ||||||||||||||
| Gary D. Butler | |||||||||||||||||
| Director | |||||||||||||||||
| Date: | February 26, 2021 | by: | /s/ Donald Clark, Jr. | ||||||||||||||
| Donald Clark, Jr. | |||||||||||||||||
| Director | |||||||||||||||||
| Date: | February 26, 2021 | by: | /s/ John M. Creekmore | ||||||||||||||
| John M. Creekmore | |||||||||||||||||
| Vice Chairman of the Board and Director | |||||||||||||||||
| Date: | February 26, 2021 | by: | /s/ Albert J. Dale, III | ||||||||||||||
| Albert J. Dale, III | |||||||||||||||||
| Director | |||||||||||||||||
| Date: | February 26, 2021 | by: | /s/ Jill V. Deer | ||||||||||||||
| Jill V. Deer | |||||||||||||||||
| Director | |||||||||||||||||
| Date: | February 26, 2021 | by: | /s/ Marshall H. Dickerson | ||||||||||||||
| Marshall H. Dickerson | |||||||||||||||||
| Director | |||||||||||||||||
S-1
| Date: | February 26, 2021 | by: | /s/ Connie L. Engel | ||||||||||||||
| Connie L. Engel | |||||||||||||||||
| Director | |||||||||||||||||
| Date: | February 26, 2021 | by: | /s/ John T. Foy | ||||||||||||||
| John T. Foy | |||||||||||||||||
| Director | |||||||||||||||||
| Date: | February 26, 2021 | by: | /s/ R. Rick Hart | ||||||||||||||
| R. Rick Hart | |||||||||||||||||
| Director | |||||||||||||||||
| Date: | February 26, 2021 | by: | /s/ Richard L. Heyer, Jr. | ||||||||||||||
| Richard L. Heyer, Jr. | |||||||||||||||||
| Director | |||||||||||||||||
| Date: | February 26, 2021 | by: | /s/ Neal A. Holland, Jr. | ||||||||||||||
| Neal A. Holland, Jr. | |||||||||||||||||
| Director | |||||||||||||||||
| Date: | February 26, 2021 | by: | /s/ E. Robinson McGraw | ||||||||||||||
| E. Robinson McGraw | |||||||||||||||||
| Chairman of the Board and Director | |||||||||||||||||
| Date: | February 26, 2021 | by: | /s/ Michael D. Shmerling | ||||||||||||||
| Michael D. Shmerling | |||||||||||||||||
| Director | |||||||||||||||||
| Date: | February 26, 2021 | by: | /s/ Sean M. Suggs | ||||||||||||||
| Sean M. Suggs | |||||||||||||||||
| Director | |||||||||||||||||
| Date: | February 26, 2021 | by: | /s/ C. Mitchell Waycaster | ||||||||||||||
| C. Mitchell Waycaster | |||||||||||||||||
| Director, President and | |||||||||||||||||
| Chief Executive Officer | |||||||||||||||||
| (Principal Executive Officer) | |||||||||||||||||
S-2